Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
RBA pauses on rates, says inflation has peaked
The Reserve Bank of Australia paused its rate hiking campaign Tuesday, leaving the cash rate target at 3.6 per cent in its first meeting without an increase since May 2022. The break, welcomed by markets, is meant to allow the tightening already deployed to take full effect and reflects a more dovish outlook from the central bank.
“The board recognises that monetary policy operates with a lag effect and that the full effect of this substantial increase in interest rates is yet to be felt,” RBA Governor Philip Lowe said in a statement announcing the decision, noting that the bank has already raised rates 350 basis points in less than a year in its ongoing fight to bring inflation down to a range of 2-3 per cent.
“The decision to hold interest rates steady this month provides the board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty.”
Lowe noted that inflation is still running very high around the world, with elevated services price inflation offsetting moderation in headline inflation, and that a subdued global economic outlook means below-average growth is expected through next year.
He also pointed to recent distress in the US and Swiss banking systems that has prompted increased volatility in financial markets and a “reassessment of the outlook for global interest rates”, all of which could lead to tighter financial conditions representing additional headwinds for the global economy.
However, he also stressed that Australia’s banking system remains strong, well-capitalised and highly liquid, leaving it “well placed to provide the credit that the economy needs”.
“Growth in the Australian economy has slowed, with growth over the next couple of years expected to be below trend.”
Market expectations confirmed
After 10 consecutive RBA rate hikes, market observers were largely in agreement in expecting the pause at the April meeting. Of 30 economists surveyed by Bloomberg, 19 predicted the central bank would hold the cash rate steady, with the rest forecasting a 25 basis point increase.
“The governor’s statement indicates that the decision to leave the policy rate on hold may not have been as close a call as we thought,” said Gareth Aird, head of Australian economics at Commonwealth Bank of Australia. He also pointed to changes in the wording of the governor’s statement that “indicate that the RBA board is less convinced that they will hike the cash rate again”.
“To be clear, the board has still retained a hiking bias, as we anticipated. But it is a more watered-down version of the previous statement.”
Paul Bloxham, chief economist for Australia, New Zealand and global commodities at HSBC, said he believes the RBA’s current hiking cycle has now peaked, with the cash rate likely to stay at 3.6 per cent “for the next few quarters”.
“We expect the RBA may soon start stating that although inflation is too high, it is ‘moving in the right direction’ and that current policy setting is appropriate to allow that to continue to happen,” Bloxham said.
Emanuel Datt, chief investment officer of Datt Capital, said the RBA “adopted a safety-first measure” in its decision to put rates on hold.
“It seems to us that the RBA has chosen to wait and observe what’s in the forthcoming May federal budget in terms of fiscal measures to attack inflation before deciding on another round of rate-rise medicine,” he said. “This is logical and, in our opinion, a good policy.”
Atchison Consulting principal Kevin Toohey agrees the bank made the appropriate decision, pointing to the “fixed-rate cliff” that will see fixed-rate mortgages roll to variable rates in the coming months.
“Today’s decision does not mean that the RBA will soon decrease interest rates,” he added. “It is important to remember inflation is still high, and the labour market is still very tight. We still see more real economic pain to come.”
Still a narrow path to a soft landing
The RBA had flagged in recent meetings that its future rate decisions would be data-dependent, with the monthly consumer price index (CPI) serving as a key indicator of inflation and economic conditions. In announcing the pause, Lowe said a “range of information”, including an easing in the CPI for February, suggests inflation in Australia has peaked.
But while goods price inflation is expected to continue moderating, he noted that rents are increasing at the fastest rate in recent years and utilities prices are rising quickly. Still, the RBA’s central forecast is for the inflation rate to fall to around 3 per cent by mid-2025.
“Medium-term inflation expectations remain well anchored, and it is important that this remains the case,” Lowe said. Contributing to that outlook is slowing growth in the Australian economy, with growth expected to be below trend for the next couple of years.
He emphasised that the RBA’s main priority is still returning inflation to target.
“If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment. The board is seeking to return inflation to the 2-3 per cent target range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.”
