RBA more dovish in outlook, signals possible pause

The Reserve Bank of Australia (RBA) raised rates as expected by 25 basis points but has opened the door for a pause should data over the next month confirm an easing of economic conditions. Bond yields fell, a sign that this is near the top.

The statement said “In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market…”

The means that any new rate rises will be data dependent and the RBA is online likely to move higher if inflation is still out of the bag. This is an acknowledgement that after 10 consecutive rate hikes, the full effect is yet to flow through to the economy and the RBA prefers to wait and see how things pan out should inflation start to moderate.

Bottom line: While not an explicit pause, we think that the RBA is now worried that it could push too far without trying to downplay the threat of inflation. If data shows that the economy is slowing, the RBA now has room to hold tight at current levels.

The Aussie dollar was down slightly against the US dollar on the statement, perhaps a sign that the RBA isn’t necessarily going down the US Fed path. The yield on the 2Y Aussie government bond note fell by 10 basis points on the news, signally a potential peak in cash rate.