The nation's debt-holders have been holding their breath in the lead-up to the announcement on Tuesday afternoon, following the inflation surprise in the March quarter that sparked anticipation for another round of rate rises. 

Prior to the decision, ASX traders were betting a 3% chance the RBA would deliver a shock rate hike.

Despite expectations of a return to a more hawkish tone in handing down today’s decision, the RBA maintained its neutral stance following the announcement to pause the rate for the fourth consecutive time since raising it at its 12-year peak in November 2023.

“Recent data indicate that, while inflation is easing, it is doing so more slowly than previously expected and it remains high,” the central bank said in its 7 May monetary policy announcement. 

“The Board expects that it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks.” 

Echoing its previous post-meeting announcements, the RBA said, “The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.”

Promising signs of inflation returning to target and early cash rate cuts were rocked when the Australian Bureau of Statistics (ABS) revealed both headline and trimmed mean inflation were higher than expectations. 

The consumer price index rose by 3.6% over the 12 months to March, overshooting forecast of a 3.5% annualised rate. 

The trimmed mean inflation, the gauge RBA uses in measuring the rise in consumer prices, accelerated to 4%, above the central bank’s indicative forecast of 3.8%. 

On a quarterly basis, the 1% growth in prices overshot the market consensus of 0.8%.

Barring Covid and the Global Financial Crisis, over the past two decades, any time time there has been quarterly inflation of 1% or greater, the RBA has moved rates north. 

Although it has kept the benchmark rate steady, the RBA has revised its near-term trimmed mean inflation forecasts in light of recent data.

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“Inflation is expected to be higher in the near term than previously thought due to the stronger labour market and higher petrol prices.

“But inflation is still expected to return to the target range in the second half of 2025 (2.6% in June) and to reach the midpoint in 2026,” the RBA said in its May Statement on Monetary Policy (SOMP). 

Recent datasets divide opinion on RBA’s move

The stubborn inflation and its re-acceleration amid a high interest rate environment have fuelled the argument that another rate hike – or rate hikes – is necessary to ensure the inflation returns to target in a reasonable timeframe.

Leading such conversation is Judo Bank chief economic advisor Warren Hogan. 

Mr Hogan believes that the RBA might have to lift the cash rate to over 5% to bring the inflation down to 2-3%. 

“There is a chance that we are not remaining soft… and if that continues to play out it's essentially telling us the 4.35% cash rate is not the right level if we want to restore price stability, that is to get inflation back down to target,” he told the Savings Tip Jar podcast.

However, that view appeared unpopular, at least among all four major bank economists and most commentators who maintained their view of another rate hold. 

“We expect the RBA Board to keep the cash rate unchanged at 4.35% today,” ANZ researchers said before the announcement.

“While we don’t expect the Board to explicitly discuss a rate hike, the communication on Tuesday will be more hawkish than March.”

NAB senior economist Taylor Nugent noted that “soft activity growth and a tighter-for-longer forecast assumption provide some offset to low unemployment and hot inflation”.

“A different set of central bankers would have had the policy rate higher sooner on the same set of data, and the RBA’s stripes as a reluctant hiker have left the near-term risks from May to August to a hike rather than a cut even at this late stage of the tightening phase,” he added. 

However, Westpac chief economist Luci Ellis said that a view necessitating a rate hike is not without its merits. 

“But it is unlikely,” she said.

“A line of argument for a rate hike hangs off the surprise in the March quarter inflation and labour force data, [but] past surprises are most relevant for what they say about the future,” Ms Ellis said.  

Westpac’s economic expert was referring to RBA’s upward revision of its trimmed mean inflation forecast in November 2023, only to see a significant downside surprise in the December quarter inflation and real-side data. 

“There is no point in warning that the disinflation journey could be bumpy if you then treat every bump as a change in trend.”

Ms Ellis said a rate hike would be necessary in a scenario where services inflation fails to decline, the federal budget proves more expansionary than expected, and wages increase at a greater rate than anticipated. 

“None of these outcomes seems likely given the atmospherics, but it is understandable that policymakers might want to see the actual results, and a bit more progress on inflation, before even thinking about cutting rates," she said.

Home prices to slow amid rate cut delay

With the outlook for rate cuts pushed back, some experts believe this will lead to a slowdown in the rise of housing prices. 

“Home prices rose quickly in early 2024, with affordability constraints overpowered by an imbalance between supply and demand,” PropTrack senior economist Eleanor Creagh said. 

“However, it is reasonable to expect a slowing from here as we move into a seasonally quieter period for property markets, especially with interest rate cut expectations pushed back."

But given the chronic undersupply of housing stock, property prices across the country are expected to further lift from the current median price of $779,817.

“This imbalance between supply and demand has offset the higher interest rate environment and deterioration in affordability and is expected to continue to do so, fuelling further price rises,” Ms Creagh said. 

“Although higher than expected inflation in the March quarter has pushed back the expected timing of rate cuts, most still expect that the next move for interest rates will be down. 

"However, the timing remains uncertain.”

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