Australia pauses rate hikes to assess tightening impact on inflation

SYDNEY (Reuters) – Australias central bank on Tuesday left its cash rate unchanged at 3.6% to break a run of 10 straight hikes, saying it wanted additional time to assess the impact of past increases on the economy and inflation.

Wrapping up its April policy meeting, the Reserve Bank of Australia (RBA) did warn that some further tightening of monetary policy may well be needed to ensure that inflation returns to target.

Markets had been wagering on a pause, while analysts were split on whether the bank would hike again given the still high level of inflation.

“The Board took the decision to hold interest rates steady this month to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook,” said governor Philip Lowe.

“The Board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt.”

Lowe said the monthly CPI indicator suggests that inflation has peaked in Australia, and goods price inflation is expected to moderate over the months ahead due to global developments and softer demand at home.

Investors reacted by pushing the Australian dollar 0.3% lower to $0.6765. Three-year bond futures were up 9 ticks to 97.14, as investors see little prospect for more rate hikes.

The RBA has raised rates by a total of 350 basis points to tame runaway inflation, which has likely peaked at 7.8% in the final quarter last year and slowed to 6.8% in February, but still remains way above the central banks target band of 2-3%.

Consumer demand is also levelling off, although the labour market is tight with the jobless rate hovering at near 50-year lows and job vacancies sharply above pre-COVID levels, while business surveys are also pointing to resilient conditions.

Housing prices are showing early signs of bottoming out, but the construction sector is in a hole, with high costs prompting the collapse of a few home builders, highlighting pockets of stress across the economy.

Reducing the pressure for the RBA to resume its hikes, markets are pricing in more aggressive rate cuts from the Federal Reserve by the year end after the recent troubles at U.S. regional banks and the Credit Suisse takeover fuelled concerns about tighter lending conditions.

(Reporting by Stella Qiu; Editing by Shri Navaratnam)