The Reserve Bank kept the cash rate at 4.35 per cent in its meeting earlier today. After raising rates at three consecutive meetings since the start of the year, the RBA Monetary Policy Board chose to wait and see how those increases are working their way through the economy. The decision to hold rates was unanimous.
The RBA Monetary Policy Board is a fairly blunt instrument, with very limited scope for what it can and can’t do. Generally, if the inflation rate is higher than the desired band, then it raises rates; if lower, it reduces rates.
Headline and underlying inflation both remain too high. Oil prices have come down in recent weeks, but energy and most related commodity prices are still above their levels before the conflict in the Middle East.
The three rises have started to do their work. Money market rates and government bond yields have climbed, the Australian dollar has strengthened, and consumer spending is slowing roughly as the board expected. The housing market has lost some steam, with prices falling in a few capital cities. Unemployment in April came in higher than forecast, though the board noted that other labour market readings have held firmer.
There’s also the impact of policy measures outlined in the Government’s latest budget that need to be factored into the equation, which are expected to curb inflation.
A decision to keep the cash rate on hold is a welcome one, given all the information at hand. However, it doesn’t mean there isn’t more pain in the coming months when the Board meets again. The chance of future rate rises is about the same as a reduction or another hold.
The RBA said in its announcement, “inflation is still too high and the Board judged that it was appropriate to leave the cash rate target unchanged while it assesses the response to previous interest rate rises and the impact of the oil supply disruption.”
Higher petrol prices have fed straight into inflation, and the board sees that starting to show up in the cost of other goods and services. That makes inflation likely to stay elevated for some time. Global oil supply won’t sort itself out quickly, the board warned, which keeps the pressure on energy prices and, by extension, on everything energy touches.
