Pain paused: RBA holds rates, for now

The Reserve Bank of Australia has declared Australian banks are strong, while giving borrowers relief after 10 consecutive rate hikes.

It’s the first time since April 2022 that the RBA has held the benchmark interest rate steady, with the cash rate to remain at 3.6 per cent after the bank’s monthly meeting today.

The bank began an aggressive tightening cycle in May 2022, with 10 increases following.

But today, the RBA opted to wait and see.

Reserve Bank of Australia governor Philip Lowe said the decision would give time to assess the state of the economy.

Nonetheless, the RBA said more hikes “may well be needed to ensure that inflation returns to target”.

Labour markets were tight and wage growth was increasing, Dr Lowe said, although economic growth overall will likely be below trend.

"There is further evidence that the combination of higher interest rates, cost-of-living pressures and a decline in housing prices is leading to a substantial slowing in household spending,” he said.

“While some households have substantial savings buffers, others are experiencing a painful squeeze on their finances.”

The latest inflation data showed promise for the RBA’s fight against price pressure, with a rate of 6.8 per cent in the year to February.

On Monday evening, financial markets were expecting the cash rate to remain steady in April, data from the ASX shows.

The numbers indicate traders assess a low probability of any further increases in this cycle, with one cut likely over the next 12 months.

Strong banks

Central bankers have had to contend with financial system instability overseas, with the demise of Silicon Valley Bank and rescue of Credit Suisse the most famous examples.

"The recent banking system problems in the United States and Switzerland have resulted in volatility in financial markets and a reassessment of the outlook for global interest rates," Dr Lowe said.

"These problems are also expected to lead to tighter financial conditions, which would be an additional headwind for the global economy.

"The Australian banking system is strong, well capitalised and highly liquid. It is well placed to provide the credit that the economy needs."

Indeed’s APAC chief economist Callam Pickering said a pause had felt unlikely a month ago, but financial stability concerns had been key.

“While as recently as a month ago, the market was pricing in several rate hikes, that shifted with the collapse of Silicon Valley Bank,” Mr Pickering said.

“Since then, markets have been pricing in a fair probability of a rate cut later this year.”

He said financial risks would have been deemed a more pressing risk than prolonged inflation.

Deloitte Access Economics partner Stephen Smith said the decision will be welcomed by millions of mortgage holders and businesses.

“Businesses of all sizes, many of which amassed large debts throughout the pandemic, have been struggling with higher interest rates and the deteriorating economic environment,” Mr Smith said.

“The effect of 10 rate rises is still working its way through the economy and there are still hundreds of thousands of pandemic-era mortgages fixed at low rates that will revert to variable over the coming year.”

He warned the chance of a “black swan event” had increased following the collapses of multiple banks.