As was widely expected by the market, the Reserve Bank of Australia has just announced its decision to keep interest rates on hold at 4.1%.
In response to the news, the S&P/ASX 200 Index (ASX: XJO) remains down 1.2% to 6,949.3 points.
The big four banks all remain in the red, with Commonwealth Bank of Australia (ASX: CBA) shares the best performers with a 0.25% decline.
Elsewhere, BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO) remain little changed and continue to weigh heavily on the market, as do retail stocks such as Super Retail Group Ltd (ASX: SUL)
What did the Reserve Bank say about interest rates?
According to the release, the central bank believes that higher interest rates are working to establish a more sustainable balance between supply and demand in the economy.
In addition, with the economic outlook remaining uncertainly, the RBA decided that it was prudent to keep the cash rate steady once again. It believes this will give it time to see how previous hikes have impacted the economy.
In her first cash rate meeting address as RBA Governor, Michele Bullock said:
At its meeting today, the Board decided to leave the cash rate target unchanged at 4.10 per cent and the interest rate paid on Exchange Settlement balances unchanged at 4.00 per cent. 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 again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.
Looking ahead, Bullock acknowledges that inflation remains too high and is expected to stay that way for some time to come. She adds:
Inflation in Australia has passed its peak but is still too high and will remain so for some time yet. Timely indicators on inflation suggest that goods price inflation has eased further, but the prices of many services are continuing to rise briskly and fuel prices have risen noticeably of late. Rent inflation also remains elevated. The central forecast is for CPI inflation to continue to decline and to be back within the 2–3 per cent target range in late 2025.
As a result, unfortunately for borrowers, Bullock is not ruling out further interest rate increases in the future. The governor concludes:
Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks. In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.
Economist reaction
CreditorWatch's Economist, Anneke Thompson, was not surprised with the decision. Thompson responded to the news by stating:
The RBA has maintained the cash rate at 4.10 per cent at the October 2023 meeting. Continuing weak retail trade and consumer confidence data is giving the board the clear sign that their efforts to reduce demand in the economy have worked very well. While some items in the CPI 'basket' continue to record price rises, these rises are by and large not related to high consumer demand, and therefore not enough to convince the RBA to move again to cool demand further.
The economy appears to be maintaining a steady slowdown, and thus far business activity is not falling precipitously. However, CreditorWatch BRI data from August 2023 does show a significant fall in the average value of invoices since their peaks in late 2019. The slowdown has been more apparent since the start of 2023, and does indicate that monetary policy tightening is impacting the SME sector already.
