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RBA may ‘step back’ from any more interest rate hikes

Pile of Australian money and people shopping in Sydney at the town hall
RBA may ‘step back’ from any more interest rate hikes

The redemption of the Reserve Bank of Australia (RBA) continued to evolve with the latest interest rate increase.

The RBA hiked the cash rate by 25 basis points after the December Board meeting, a move which took official rates to 3.1 per cent. Since May 2022, there has been a cumulative 300 basis points of interest rate increases, delivered as the RBA works to slow the rate of economic growth and with that the rate of inflation.

There are a number of issues for the economy that have flowed from the RBA interest rate actions through 2022.

Most importantly, the RBA implemented the correct policy settings for the times. RBA governor Philip Lowe has copped a lot of criticism but he should be praised for not sticking to his plans to keep rates at 0.1 per cent through to 2024. That would have been a horrible mistake.

Whilst the RBA’s communications and actions have been misguided in recent years, the renewed and revamped focus on lowering inflation whilst maintaining an eagle eye on the labour market – not wanting to cause a recession in other words – has been is good economic policy.

Interest rate rises were a non-negotiable tactic to get inflation down, but taking rates too high would risk a 2023 recession with a resultant sharp jump in the unemployment rate.

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It has been a difficult balancing act that so far, has been managed well.

This is why it has taken 25 basis point hikes as baby steps in each of the last three months rather than slamming on 50 or even 75 basis point hikes as other central banks in other countries have deemed necessary to control inflation.

It is a reasonable bet that within the next 12 months, many central banks will be troubled by domestic recessions their over-egged policy hikes have delivered and they will no doubt be surprised that inflation is cascading towards their targets.

The RBA is unlikely to have the same problem. It is likely to be watching the Australian inflation rate track back towards its target, but with the economy still expanding and only a small and acceptable rise in the unemployment rate.

Indeed, the RBA may step back from any more interest rate hikes and watch many other countries achieve lower inflation but crunch their economies. If global inflation does in fact free-fall in 2023, as is likely with economic hard landings in the US, Europe, the UK, New Zealand and possibly Canada, the lower inflation rate will be seen in Australia, without us having to fall into recession.

Will there be more interest rate rises in 2023?

For the first half of 2023, the RBA is likely to leave official interest rates steady at 3.1 percent. It knows that the pipeline of rate hikes that have already occurred in recent months are yet to impact already slowing growth. More hikes are simply not needed.

Quarterly inflation readings are set to ease to a 0.25 to 0.75 per cent range in the March and June quarters and the unemployment rate is set to edge up, albeit slightly. And as noted, global economic growth will be weak.

This will be all the evidence the RBA will need to signal an ‘on hold’ strategy with a neutral outlook.

If, as seems likely, the Federal Budget in May keeps government demand as a neutral element to the growth and inflation outlook, the case for steady rates will be even stronger.

This begs a question – could the RBA be in a position later in 2023 or even 2024 to take interest rates lower?

It is too early to be making that call. Let’s see the inflation rate fall first before assessing that. But it is increasingly clear that the RBA will happily sit back in the months ahead as it watches growth slow, inflation ease and the unemployment rate tick up a little.

All the signs are pointing to a soft landing for the economy in 2023.

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