BILL’S BITES: RBA’s August pause could signal rate peak

The Reserve Bank’s decision to leave the cash rate unchanged at 4.1 per cent at its August Board meeting took us by surprise. 

We had expected another increase given the tight labour market and the fact that the Board had a clear tightening bias. 

With Governor Philip Lowe indicating that the RBA now expects inflation to be back within the 2-3 per cent band by the end of 2025, and that recent economic data is consistent with them reaching the target, we now believe the cash rate will remain on hold. 

So it looks as though the rate will end up peaking at 4.1 per cent, as we had predicted back in February. Of course, we later increased our forecast terminal rate, reflecting a high degree of uncertainty around the outlook. 

We now expect that the next move will be down, although not until the September quarter of next year. We’ve pushed back our forecast for the timing of that rate cut from the June quarter because the peak is lower now, and we're also starting to feel a bit more optimistic about the economy. 

The labour market remains strong, which will tend to boost household incomes and means that the profile for consumer spending looks a little better than we previously thought.

The Reserve Bank also indicated that they now believe that the link between tight labour markets and inflation maybe a little different than in the past.

Generally, when labour markets are tight businesses have to raise wages to attract and retain staff, but if demand in the economy is weak, then businesses may have trouble passing on those wage increases and therefore the link between tight labour markets and inflation breaks down.

That's a something we've seen globally, and will be at the forefront of the RBA’s thinking for the next year or so. 

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