The RBA pauses for the 2nd time in 14 months (but don't rejoice just yet)

The Reserve Bank of Australia has paused interest rate hikes for the second time in four months. Once again, and just like it did at its first pause in April, the Bank wants to use this time to "assess the impact of the increase in interest rates to date and the economic outlook". 

For those who don't watch the minutiae of central banking, this simply means that it needs more time to work out how 400 basis points worth of rate hikes is actually playing out in the Australian economy. Economic growth and inflation are undoubtedly slowing while asset prices continue to march (steadily) higher. 

But it doesn't take a long memory to remember what happened the last time the Reserve Bank tried to pause interest rate hikes. 

And if you believe at least one economist, the Reserve Bank may very well capitulate again next month. 

In this wire, I'll succinctly take you through the biggest changes in the RBA's monthly statement - and take you through what some of Bridge Street's finest are saying now. 

The changes

This entire paragraph is new:

"Interest rates have been increased by 4 percentage points since May last year. The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so. In light of this and the uncertainty surrounding the economic outlook, the Board decided to hold interest rates steady this month. This will provide some time to assess the impact of the increase in interest rates to date and the economic outlook."

The RBA is taking some comfort in the latest monthly inflation indicator print - even though it (and every other economist) full well knows it's still a noisy and new data series:

"Inflation in Australia has passed its peak and the monthly CPI indicator for May showed a further decline. But inflation is still too high and will remain so for some time yet."

Out goes the "soft landing" reference and in is the "balance" reference

"The Board is still expecting the economy to grow as inflation returns to the 2–3 per cent target range, but the path to achieving this balance is a narrow one."

And, as one would expect, the Board has bought itself some optionality 

"Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve."

Instant reaction

Russel Chesler from VanEck is issuing a cautionary tale for anyone who thinks this really is the end of the rate hiking cycle:

"The RBA’s pause today may give consumers a false sense of security. Just because the RBA holds steady in July doesn’t mean another rate rise isn’t around the corner in August."

Chesler actually thinks they will go two more times, in line with the predictions of others like AMP. 

"Given the RBA’s mandate, the central bank may have no choice but to hike rates even higher than markets have anticipated. Indeed, there is now a real chance the RBA pushes rates above 4.6%."

Dwyfor Evans of State Street Global Markets also kept his thoughts very succinct. August is still a live meeting even if they've decided to hold tight for the moment.

"The bias of the remarks are sufficiently hawkish to keep further hikes on the table and ensure August remains a live meeting for policy change."

Shane Oliver of AMP is playing the "they will but they shouldn't" card.

"We think RBA has done more than enough but [we] still expect two more hikes to 4.6%," he tweeted today.

Barclays economists believe it will be one more and done.

"We think the RBA is now turning less hawkish and expect one final hike in August before the bank goes on hold. We expect cuts to start in Q1 24," they wrote.

Both the ANZ and NAB acknowledged before today's decision that this would be a close call - but both also acknowledged that a pause today doesn't take away the risk of more rate hikes starting as soon as next month after the June quarter inflation print is revealed.

Tharenou's view

Then, there's the view of UBS' Australia-based economist George Tharenou. Tharenou has had nailed each of the last 12 RBA rate moves, including the three counter-consensus calls which sent the market into a frenzy (May and June's hikes included). Once again, Tharenou was right on the money with today's call. Here's what he wrote to clients as recently as last Friday following the monthly retail sales report.

As best as this humble economic watcher can tell, Tharenou has not given a terminal rate forecast beyond this one more hike. Most economists are now at 4.6%, with Goldman Sachs and Capital Economics among the key outliers, at 4.85%. But if you prefer the view of Coolabah Capital's Christopher Joye, we may see a 5-handle on the cash rate before long.