Reserve Bank of Australia holds rates steady as Lowe bows out, markets bet tightening cycle over

Australia's central bank on Tuesday kept interest rates steady for a third month at the last meeting chaired by Governor Philip Lowe, encouraging speculation the tightening cycle was over as policymakers indicated they have a firmer grip on prices. Wrapping up its September policy meeting, the Reserve Bank of Australia (RBA) held rates at 4.10 per cent and said recent data were consistent with inflation returning to the 2–3 per cent target range in late 2025. It reiterated that further tightening may still be required to bring inflation to heel.

Markets and economists had wagered on a steady outcome after a batch of economic data - including inflation, wages and jobs - came in below expectations and offered no compelling reason to restart the tightening cycle.

The Australian dollar extended earlier losses to be 1.2 per cent off to $0.6384, the lowest in more than a week. Markets moved to trim bets of one last hike before the year-end to just 30 per cent from around 36 per cent early in the session. 

Lowe said the board will continue to monitor the global economy - noting uncertainty with the Chinese economy, household spending, and the outlook for inflation and the labour market to see if further tightening would be needed.

He warned that prices of many services are rising briskly and rent inflation was also elevated.

Minutes of the August meeting showed the central bank now sees a credible path where inflation would return to the target band in 2025, with interest rates at their current level, implying the hurdle to another hike is high.

'EXTENDED PAUSE'

The incoming governor Bullock last month struck a similar tone to Lowe, saying rates may need to rise again and policymakers would be watching data and decide on rates on a monthly basis until at least the end of this year.

"Recent data has fallen the way the RBA would have hoped," said Tony Sycamore, market analyst at IG.

"While RBA Governor Lowe may have been slow to start hiking rates, he departs with his head held high, knowing that much of the heavy lifting required to bring inflation under control is in place ahead of Michele Bullock's tenure." Consumer inflation eased by more than expected to 4.9 per cent in July, while soft wages data suggest the chance of a much feared price-wage spiral is low and the red-hot labour market might be at a turning point.

The RBA has jacked up interest rates by a whopping 400 basis points since May last year, with the cash rate sitting at 11-year highs, but the full impact of the tightening is only being felt now as inflation eases and economic growth slows. Data on Tuesday showed the Australian economy got a boost from net exports and government spending in the second quarter, greatly lessening the risk of a contraction in gross domestic product. The second quarter GDP data is due on Wednesday.

However, growth is set to stay subdued, with analysts expecting GDP to have expanded by a meagre 0.3 per cent in the quarter as consumers tightened their belts in the face of the high cost of living and rising mortgage repayments. "Overall, we see nothing in today’s decision or statement to push us off our view that the RBA is on an extended pause as it examines how the 400bp of monetary tightening to date washes through the economy," ANZ economists said in a note.