The reason for a rate ‘pause’ makes good sense …
The Reserve Bank board have defied market expectations and kept official interest rates on hold at 3.85 per cent. Markets were overwhelmingly forecasting a 0.25 per cent cut, which would have been welcome relief for millions of mortgage holders looking to ease the cost-of-living crisis.
But the RBA Governor has calmly addressed the surprise rate hold:
Wait and see
Watching RBA Governor Michele Bullock’s press conference, she was just so impressive in explaining the pause.
Basically she wants to wait for the June quarter CPI figures (to be released on July 31) because she is a bit troubled by rising building costs and prices of durable goods. The March quarter CPI (the trimmed mean version which the RBA prefers) came in at 2.9 per cent, which is only just in the RBA’s 2-3 per cent target range.
Bullock wants the CPI figures to prove they can sustainably be in the middle of the range (2.5 per cent). But she has this doubt in her mind that building costs and durable goods prices may push the June quarter CPI trimmed mean back to above 3 per cent. If that happens, it indicates to her that inflation is not sustainably under control and rates may have to go UP again.
“A lot of people focused on the headline CPI number, 2.1 per cent. But we don’t think inflation, in a sustainable way, is that low. We think it’s higher,” Bullock said.
Avoiding a rates roller-coaster
Her view is that Australians wouldn’t have wanted a rate cut this week if a rate rise followed soon after. It would undermine everyone’s confidence.
With the June quarter CPI out 31 July and the next RBA board meeting on 11-12 August, why not wait to be certain of making the right decision?
She was very clear that if the June quarter trimmed mean CPI stayed within the target range (and hopefully gravitates closely to 2.5 per cent) then a rate cut is a certainty.
Plus, there’s Trump …
I don’t reckon you can fault her logic even though this week’s decision would have disappointed a lot of people. She did point out that unemployment is very low so most Australians have a job if they want one which helps household cash flows.
The other big concern for the RBA is the ongoing uncertainty around a tariff war. The RBA’s statement emphasised, “Uncertainty in the world economy remains elevated,” but “financial market prices have rebounded with an expectation that the most extreme outcomes are likely to be avoided.”
But the Trump-imposed 1 August tariff deadline comes the day after the June quarter CPI and before the next RBA board meeting, so all that information will be available to make a decision.
