Reserve Bank governor Philip Lowe says high interest rates 'are working'

In a widely-tipped decision, the Reserve Bank of Australia board decided to extend its monetary policy pause following evidence that inflation retreated to 6 per cent in the June quarter and consumer spending was unexpectedly weak in June.

Philip Lowe, delivering his second-last monetary policy decision as Reserve Bank governor, said higher interest rates were working to bring inflation down without driving the economy into recession or causing a big increase in unemployment.

"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," Dr Lowe said.

Treasurer Jim Chalmers said the RBA's decisions would be met with "a sigh of relief around Australia".

"Today's decision is a welcome reprieve ... but people are still under the pump," the treasurer told Parliament.

While the country was "making progress in this fight against inflation", Dr Chalmers said, providing cost-of-living relief remained the government's "highest priority".

But Dr Lowe noted that inflation was still too high, with rent charges "elevated" and the cost of many services "rising briskly".

The RBA made its decision armed with the latest economic forecasts from the central bank staff, which are due to be publicly released on Friday.

The governor's remarks indicate that the Reserve Bank remains confident that, despite a 4 percentage point increase in rates since May 2022, the economy will skirt a recession and continues to expect a gradual easing of inflation.

"The central forecast is for inflation to continue to decline, to be around 3.25 per cent by the end of 2024 and to be back within the 2 to 3 per cent target range in late 2025," Dr Lowe said.

The RBA boss admitted high interest rates were clamping down on economic activity.

"The Australian economy is experiencing a period of below-trend growth and this is expected to continue for a while. Household consumption growth is weak, as is dwelling investment," he said.

The central bank predicts growth next year will slow to 1.75 per cent before recovering a little to "above 2 per cent" in 2025.

As a result, the RBA expects the unemployment rate to reach 4.5 per cent late next year, which is about six moths earlier than it had been forecasting.

But the outlook was clouded by significant uncertainty, Dr Lowe said.

Services inflation could prove to be more persistent than expected and it was unclear how prices and wages would respond to the contrasting forces of slowing growth and a tight labour market.

Many households were experiencing a "painful squeeze" on their finances while others were benefiting from rising house values, substantial savings and higher interest income, the governor said.

But, in a warning that the fight to defeat inflation was far from over, Dr Lowe added that "some further tightening of monetary policy may be required".

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Opposition treasury spokesman Angus Taylor noted the governor's warning and said that, despite Tuesday's rates pause, "the truth of the matter is there's enormous pain out there".

Mr Taylor said it was not sufficient just to bring inflation back to within the target band, but to keep it there.

"We know from past bouts of inflation that it is very difficult to achieve. And the fact of the matter is that the government plays a big role in this," he said.

KPMG chief economist Brendan Rynne said at least one more rate hike was likely in the next three months.

Dr Rynne said services inflation was high and showing no sign of easing, wages growth was strengthening and unemployment was low.

The nation's productivity performance could also figure in the central bank's calculations, according to EY Oceania chief economist Cherelle Murphy.

Productivity has stagnated and if it does not improve, the Reserve bank's inflation forecasts "will not be met and further rate hike will likely be necessary", Ms Murphy said.

But others are not so sure.

ANZ's head of Australian economics, Adam Boyton, expects the current rates pause to be an extended one.

Mr Boyton said Dr Lowe's statement makes it clear the RBA will be guided by the data in determining whether or not further hikes were needed.

"We see nothing in [the] decision or statement to push us off our view that the RBA is now on an extended pause," he said.

Putting rates on hold was "the right call", said Deloitte Access Economics partner Stephen Smith.

Inflation had peaked and was retreating, Mr Smith said, and while there was still work to be done to lower it, "that can no longer be achieved through higher interest rates".