Why the RBA's August pause doesn't rule out another hike in September

[Update : The RBA kept rates on hold in September 2023]

It's been a long time since we've had two consecutive pauses from the Reserve Bank of Australia. March/April 2022 for those who count all periods and late 2010 for those who only count rate hiking cycles. 

But today, the Reserve Bank kept rates on hold as it looks to gather more information on how its efforts are affecting the broader economy. While some impacts will be nearly instantaneous (consumer sentiment), others will take time to reveal themselves (think GDP and retail sales). 

Naturally, there is a massive sigh of relief among investors (and the relative minority of economists who called today's pause). 

In the equity markets, you could almost hear the cheering in the price action. In the bond and currency markets, things were a little more muted given today's pause was already entrenched in the rates curve. In fact, rates traders priced just a 20% chance of a hike.

ASX 200, AUD/USD, Australian 3-Year Yield

So again, the hopes of a nation are raised. Is this the pause that will finally last? In this wire, I'll explain why this pause could easily be backflipped again next month (albeit with incredibly strong caveats). 

But first, the statement

The last paragraph usually provides many of the clues. But in this month's statement, the changes and the reasoning are spread well throughout the document. Here is the primary reason for its decision to pause:

"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," the central bank wrote. 

Inflation, which is public enemy number one, is still the central bank's main concern. The RBA expects inflation will remain above target until at least the end of 2024. But, as many economists have already pointed out, services inflation remains the big challenge.

"Services price inflation has been surprisingly persistent overseas and the same could occur in Australia," the RBA statement read. 

Productivity, which is the RBA's other primary concern, has been pushed further up the statement in a sign that it is becoming more concerned about whether wages and work output are increasing hand in hand. 

"At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up," it said. 

Finally, the outlook for consumption remains uncertain. What's clear is the slowdown but what's unclear is where the slowdown stops.

"In aggregate, consumption growth has slowed substantially due to the combination of cost-of-living pressures and higher interest rates," the RBA wrote. 

We'll hear more about why the RBA erred towards the decision it did on Friday when the latest Statement on Monetary Policy is issued. That document disseminates the Bank's own forecasts for key economic data. And while its accuracy has been less than ideal, it's still the main internal tool that the Board uses to make decisions on interest rates. 

And now, the reaction

The overwhelming view among the professionals heading into this afternoon's decision was 'if not now, then next month'. After all, the Reserve Bank has told us for a while now that the debate which goes into the rates decision has been "finely balanced". 

The major investment banks of Citi, Morgan Stanley, and UBS all had hikes priced in today. All admitted that the chance of a hike next month was possible with George Tharenou at UBS arguing that today's pause suggests it's here to stay.

"If the RBA don't 'immediately' hike in August, when they are still not achieving their mandated goals, and are not expected to in the near-term (i.e. inflation is still too high, and the unemployment rate at a 50-year low of 3.5% – then it's unclear what could actually trigger them to hike again at a later time," he wrote to clients. 

Before today, Tharenou had argued that one extra rate hike would increase the chance of an Australian recession from 25% to 50%. 

In its note to clients, Citi's Josh Williamson noted that the combination of a fully employed labour force and minimal downside revisions to inflation should actually imply two more rate hikes are coming. And Nomura's Andrew Ticehurst, once the most hawkish economist on the street, argued you can't rule out more rate hikes even if one didn't come this month. Ticehurst called for a pause at today's meeting.

"We estimate a one in three probability of a 25bp hike, and think it appropriate for the market to price in another 25bp of tightening over the next few months ... We think it retains little tolerance for any future upside inflation surprise," he wrote. 

Bank of America economists called for a hike today for no better reason than - as they put it - just in case.

"We think there would be a choice to deliver an 'insurance hike' before an extended pause as we expect economic conditions to decline further. This will make it difficult to deliver any further tightening later," they wrote.

Of the Big Four, only ANZ had a pause pencilled in for today's hike. Chief Economist Richard Yetsenga and his team argue that this is the start of an "extended pause" from the central bank. In other words, the cash rate will be left unchanged from here. 

"We expect[ed] the RBA to leave the cash rate unchanged in August. This would mark the second month of what is likely to be an extended pause, as the central bank assesses the impact of the 400bp of tightening undertaken so far," the team wrote late last week.

In contrast, CBA's economics team argued today's move should have been a hike. 

So was today's move prudent or foolish? All will emerge within the next 12 to 18 months. For now, there's one Board meeting left under Governor Philip Lowe and he can (still) go out with a bang. 

What do you think? Let us know your thoughts on the RBA's latest pause in the comments section below.