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FIVE at FIVE AU: RBA pauses rate hikes as ASX rises again

Published 04/04/2023, 04:00 pm
© Reuters FIVE at FIVE AU: RBA pauses rate hikes as ASX rises again
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It has been another solid day for the ASX.

The S&P/ASX200 gained 11.40 points or 0.16% to 7,234.40. Over the last five days, the index has gained 2.85% and 2.78% year to date.

The top-performing stocks in this index are Whitehaven Coal (ASX:WHC) Ltd and New Hope Corporation Ltd, up 4.79% and 4.66% respectively.

Energy was the leading sector up 1.50%, while Materials went in the opposite direction losing 0.82%.

Of course, all eyes today were on the Reserve Bank of Australia (RBA).

Interest rates on hold

After 10 consecutive interest rate hikes, the RBA has hit pause keeping the official cash rate at 3.6%.

The catalysts for the RBA’s inaction this month were weaker than expected economic data including a larger than expected decline in CPI and the fallout of the banking collapse.

RBA governor Phillip Lowe did warn that further monetary tightening may be necessary to return inflation back to the target 2-3%.

“The decision to hold interest rates steady this month provides the board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty,” Lowe 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.”

It is likely there will be one further push to 3.85%, but mortgage holders can breathe a sigh of relief for now.

Tiger Brokers Australia chief investment officer Brett Reynolds said of a potential rate rise in future, “As the market expected, the RBA has left interest rates on hold. Given the significant lift in rates we’ve seen in recent months, it is not a surprise to see the board pausing to see the impact this is having.

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“This does not signify an end to the increase in interest rates. I expect rates to go higher, likely to four per cent.

"The RBA will most likely hold rates again in May but come the middle of the year another 25 basis point rise can be expected.

"While the rate of inflation is easing, it is still incredibly high. The RBA will continue to seek to bring inflation under three per cent.

“For our local share market, this is likely to result in indexes hitting all-time highs. Our banks remain solid. April is likely to be a strong month on the ASX.

“Our interest rates remain low against other developed economies. Inflation in many other countries is also higher, resulting in central banks continuing to raise interest rates. The outlook in Australia is much brighter than many other countries.”

PropTrack senior economist Eleanor Creagh said of the pause, “The impact of interest rate rises is being counterbalanced by the strong rebound in immigration, and tight rental markets, which combined with the limited stock on market are underpinning home prices.

“If stock levels remain constrained, the bounce is likely to continue to firm.”

Relief is the key word of the moment said Deloitte Access Economics partner Stephen Smith.

“To the relief of Australians struggling with cost-of-living pressures, the RBA today decided to halt its record-breaking run of interest rate hikes, conceding to signs that both inflation and economic growth are slowing.

“Today’s decision will not just be welcomed by millions of mortgage holders struggling under the burden of rising mortgage repayments. 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.

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“The RBA’s decision to pause rates is welcome. 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.

“Meanwhile, the heightened uncertainty in the global financial system following the collapse of multiple banks has increased the chance of a black swan event shaking the global economy.

“Although Australians will approve of today’s monetary policy decision, most will need to keep a close eye on the household budget for the remainder of the year."

CreditorWatch chief economist Anneke Thompson said the pause brought the RBA a month to assess incoming data.

“For the first time since the start of this monetary policy tightening cycle, the RBA was faced with a set of data that gave it no clear indication of which way to move.

"On the one hand, businesses are still reporting very strong conditions and the labour market is still very tight. On the other hand, retail spending has flatlined since September (and must be falling on a per capita basis), and inflation is falling, though still high and well out of the target range.

"It is clear the economy is at an inflection point, the only question now is how hard will it fall,” Thompson said.

“Today’s decision will buy the RBA one more month to assess incoming data before inflicting any more pain on Australian borrowers.

"Overseas, European and US central banks continue to increase interest rates to fight inflation despite pressures in the banking sector in their jurisdictions.

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"The Australian economy is particularly sensitive to interest rate rises, more so than the US or Europe, due to the volume of borrowers on or soon moving to variable interest rates. This relatively unique factor is probably the main one allowing our central bank to pause, where others are still tightening.

“It is highly likely that monetary policy is now in restrictive territory. That is, the economy cannot grow with the cash rate as it stands.

"This is, of course, intentional, and now the question is how long the RBA needs to keep the cash rate in restrictive territory before they can release the brakes, so to speak, and allow less restrictive credit conditions.

“For businesses, particularly small businesses that have less cash reserves and are more reliant on lines of credit for growth or smoother cash flow, the next six months or so are going to be very challenging.

"A strong labour market is insulating Australian households and businesses from a serious cash crisis. However, once Business Sentiment turns, it is highly likely the labour market will soften with it.”

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