Key Points:

- The Reserve Bank of Australia (RBA) maintains the cash rate in April unchanged at 3.6% after 10 consecutive rate hikes.

- The RBA needs more time to evaluate the effects of previous rate increases due to the slowing economy and peak inflation.

- Market expectations divided on further rate hikes, Australian dollar dips and bond futures rise, signalling possible pause in rate hikes in the near term.

- Major banks estimate inflationary pressures may ease off in late 2023 and early 2024, potentially leading to RBA relaxing its stance on cash rate and implementing rate cuts.

Australia's central bank, the Reserve Bank of Australia (RBA), decided to keep its cash rate unchanged at 3.6% during its April policy meeting, ending a series of 10 consecutive rate hikes.

The RBA stated that it needed more time to evaluate the effects of previous rate increases, especially as the economy is slowing down and inflation has reached its peak. However, the RBA did caution that there may be a need for further tightening of monetary policy in the future to ensure that inflation returns to the target level.

Market expectations on cash rates

Market expectations were divided on whether the RBA would implement another rate hike, considering the persistent high level of inflation. As a result of the RBA's decision to keep interest rates unchanged, the Australian dollar dipped by 0.4% to $0.6758, and three-year bond futures rose by 9 ticks to 97.14.

This shift in futures markets also suggests that there may be a pause in rate hikes in May, signalling that further increases are unlikely in the near term. Governor Philip Lowe stated that the decision to maintain interest rates at their current level was driven by the need to assess the state of the economy and the outlook, given the existing uncertainty in the economic environment.

According to Gareth Aird, an economist at Commonwealth Bank of Australia, the change in forward guidance by the Reserve Bank of Australia (RBA) indicates that the board may be less certain about the need for future rate hikes. Aird noted that although the RBA has retained a bias towards tightening monetary policy, the latest statement seems to be a more subdued version compared to previous ones. Aird maintained his prediction that rates would peak at 3.85%.

Bill Evans, the chief economist at Westpac, also echoed a similar sentiment, stating that there is currently insufficient evidence for the RBA to change its terminal rate forecast of 3.85% after the recent decision to pause rate hikes.

Possibilities of rate cut or recession

Although there is no definitive certainty about the economy's trajectory, the risk of a potential recession looms as the RBA makes its policy decisions, particularly considering that inflation has been primarily driven by supply-side disruptions rather than traditional consumer demand.

A recession can have detrimental effects on mortgage holders, leading to defaults on payments and dampening consumer spending due to the burden of high debts. This may prompt the RBA to cut the cash rate and reverse its previous tightening measures in order to provide an emergency boost to the economy.

However, factors such as strong employment levels, relatively high consumer spending, and the easing of global disruptions may mitigate some of these concerns for now. Additionally, major banks estimate that inflationary pressures on the economy may ease off in late 2023 and early 2024, potentially providing incentives for the RBA to relax its stance on the cash rate and implement rate cuts.

As borrowers plan for the future, it may be necessary to consider longer-term perspectives beyond monthly repayments. This could provide some hope for potential relief on the horizon.

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