RBA holds interest rates but Australia on cusp of ‘genuine recession’ after ‘rotten’ update

Borrowers fearing speculation of an interest rate hike will be glad there’s a hold, but Australia’s per-capita recession may already be on the brink of crisis.

The Reserve Bank of Australia (RBA) has kept the cash rate on hold at a 12-year high of 4.35 per cent. The central bank said the outlook for interest rate drops remains "highly uncertain" amid a warning the nation was at risk of falling into a recession.

The central bank’s decision to keep the cash rate steady on Tuesday was widely predicted by economists, despite hotter-than-expected inflation in the quarter to March. However, it was delivered hours after the Australian Bureau of Statistics revealed retail sales volumes fell 0.4 per cent in the March quarter - the fifth time in the last six quarters.

Economist and Yahoo Finance contributor Stephen Koukoulas described these “miserable” numbers as proof Australians were pulling back their spending as he issued a warning that the economy desperately needs an interest rate cut or it risks plunging from our current per-capita recession into a “genuine” one.

“The economy is exceedingly weak. It's being crushed under the weight of oppressive monetary policy. Consumers are responding to the fact their cash flows are being hammered by high interest rates and cost of living pressures,” he said.

Michele Bullock and a crowd.
The Reserve Bank of Australia has kept interest rates on hold. (Source: Supplied)

"We've got this situation where we're probably going to be on the cusp of not just a per capita recession, but genuine recession. The Reserve Bank needs to get on the spike and cut interest rates.”

"The process of returning inflation to target is unlikely to be smooth."


That's the warning the board had for Australians when it detailed its decision to hold the cash rate.

The path to an interest rate drop is "highly uncertain" and the central bank has admitted inflation has not only remained high, but it's dropping slower than expected.

"The Board expects that it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks,' the board said in a statement.

"The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out."

That little nugget there - "not ruling anything in or out" - is much softer than language expected if a tightening bias were in the RBA's short-term plans, Koukoulas said.

However, Bullock poured cold water over hopes of an interest rate cut being guaranteed by the RBA this year.

"I hope I didn't give any impression that there would be any interest rate cut by the end of the year,” Bullock said in her post-decision press conference on Tuesday. “I certainly don't believe I ever gave people that impression and you would understand why I'm very cautious about suggesting any rate increases or decreases.”

Bullock said interest rate cuts were not the silver bullet those suffering through the cost-of-living crisis might think it is.

“I would say to people who are struggling, part of the reason is not just interest rates. It's inflation,” she said.

Some have argued the data shows that inflation isn’t falling fast enough to hit the RBA’s 2-3 per cent target band and that its strategy needs to be revised.

However, the RBA board said the plan is working and has stuck to its projection that inflation will drop before the end of 2025.

The RBA board said it would monitor the "global economy, trends in domestic demand, and the outlook for inflation and the labour market" before making any decisions about interest rate cuts, or hikes.

A key figure will be March GDP, which comes out in early June.

Koukoulas has argued the early signs were promising that inflation was moving in the right direction.

“To say that monetary policy needs to be tightened again is to be looking in the wrong direction. The economy is slowing and it's a matter of time before inflation hits the target… with current policy settings,” he said.

Bullock was measured in her third address the media after months of silence.

She candidly admitted she was being impacted by inflation, expressing shock at the price of filling up her petrol tank.

The governor said the stickiness of inflation has been "frustrating", but reiterated, in somewhat of a nod to her predecessor's catchphrase of the 'narrow path', that she believed the RBA was on the "right path".

Despite this, Bullock said the board will not hesitate to "see the job through" if further interest rates are needed.

"If we have to move, we will," she said.

Economists are divided on an interest rate cut, some forecasting one in November and others claiming there's another three in our future.

  • Commonwealth Bank (CBA): Cash rate peak: 4.35 per cent. First cut: Likely November 2024. Rates to drop to 3.10 per cent in late 2025.

  • ANZ: Cash rate peak: 4.35 per cent. First cut: Around November 2024. Rates to drop to 3.60 per cent by this time next year.

  • NAB: Cash rate peak: 4.35 per cent. First cut: November 2024. Rates to drop to 3.10 per cent by the end of 2025.

  • Westpac: Cash rate peak: 4.35 per cent. First cut: November 2024. Rates to settle at 3.10 per cent in September quarter of 2025.

Former governor Lowe has warned this week the fight against inflation is not over, and rate hikes could be used to fight against it.

There are banks making out-of-cycle interest rate cuts to remain competitive, with mortgage holders urged to shop around.

Even if the RBA does cut interest rates, experts have warned the major banks may not pass on any cash rate cuts in full to mortgage holders.