Relief for borrowers as RBA opts to leave rates untouched

Federal budget forecast

Source: Jim Chalmers

The RBA has again left interest rates untouched, in a decision widely predicted by economists.

The Reserve Bank of Australia board has just announced its official cash rate decision for May.

“Inflation is still high and is falling more slowly than expected,” the board said in its decision.”

“Bringing inflation down to the 2-3 per cent target range is the Reserve Bank board’s highest priority. The board’s decision to hold the cash rate supports inflation returning to target.”

Tuesday’s announcement leaves the rate at 4.35 per cent – where it has been since November – and spares millions of Australians another painful hike following an almost $1200 increase on payments on a typical $500,000, 25-year loan in the most recent cycle of increases.

The board expects that it will be some time yet before inflation is sustainably in the target range … Keeping the cash rate at the current level supports continued progress of inflation to the target and moderate growth in employment,” the RBA board said.

“The outlook remains uncertain. The path of inflation on its return to target is unlikely to be smooth. The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out.

“The board will rely upon the data and the evolving assessment of risks and remain vigilant to the risks of inflation remaining too high.”

Heading into the board’s latest two-day meeting, analysts were broadly expecting a further pause.

However, following stronger domestic and overseas inflation data, a shadow RBA board of economists at the Australian National University said they were less confident in their recommendation to hold interest rates steady.

“The persistence of inflation, especially in the United States, and the consequent need for monetary policy to be tighter for longer than expected, is of immediate relevance to the RBA,” the shadow board wrote.

Economists also expected updates to near-term forecasts and changed posturing around future interest rate moves. It follows recent predictions that cuts to official rates may be delayed into 2025.

Ahead of the meeting, some suggested the Reserve Bank board may need to warn that further hikes were yet possible after its softer stance at meeting in March.

The May meeting is the board’s last before next week’s federal budget.

Economists and the opposition have warned Labor to keep its spending in check to avoid fanning the flames of inflation and putting pressure on the RBA.

KPMG chief economist Brendan Rynne said a budget in “expansion mode” would be the biggest threat to inflation taking off again.

He said government spending as a total of GDP was too high, running at about 27 per cent compared to the pre-pandemic average of about 24 per cent.

“What we really need now is for the federal budget not to add to aggregate demand – it should be neutral, or if possible, even slightly contractionary,” he said.

Shadow treasurer Angus Taylor said the government needed to “contain its addiction to spending” or risk inflation staying higher for longer.

Treasurer Jim Chalmers has said both “scorched earth austerity” and “free-for-all spending” must be avoided, noting that the economy is also dealing with slowing growth as well as persistent inflation.

“We are charting a responsible middle path,” he said on Monday.

-with AAP

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