Reserve Bank of Australia, First Central Bank to “Pause” then “Un-Pause,” Hikes Again, Warns of More Hikes. QT Continues

Markets surprised by hike and hawkish tilt on fears about inflation expectations and surging labor costs without productivity gains.

By Wolf Richter for WOLF STREET.

The Reserve Bank of Australia had become the first major central bank among developed economies to “pause” and then “un-pause” its rate hikes. It paused at the meeting in April. This was widely ballyhooed as a harbinger for the Great Pause that would spread among other central banks, to then be quickly followed by the Great Rate Cuts – in months not years. Those hopes got crushed when the RBA became the first central bank to un-pause at the May meeting with a 25-basis point hike.

Today, the RBA hiked its cash rate another 25 basis points to 4.1%, the highest since April 2012. It put more hikes on the table. It indicated that it is getting nervous about inflation expectations becoming unanchored. And it fretted about surging labor costs that weren’t matched by productivity gains. This hawkishness surprised a lot of observers who’d counted on a re-pause.

Puts additional rate hikes on the table: “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe,” the RBA said in the statement.

Inflation – for Q1, at 7.0%, above the expectation of 6.9% – has become an intractable problem. The dynamics are practically everywhere the same, including in Australia: While energy prices plunged, and inflation in goods backed off, inflation has shifted to services, and services are the biggest part of the economy, and inflation has moved into wages that are surging to keep pace with rising consumer prices, but without matching productivity gains.

“Recent data indicate that the upside risks to the inflation outlook have increased and the Board has responded to this,” the RBA said.

Gets nervous about inflation expectations: Ominously, the statement omitted the language of prior statements, that “Medium-term inflation expectations remain well anchored.” In today’s statement, there was nothing about “well-anchored,” or anything “anchored.”

Instead, the RBA showed its nervousness about inflation expectations by adding a new phrase:

“The Board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very low rate of unemployment,” it said.

And it repeated its standard phrase on inflation expectations: “And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.”

Frets about rising labor costs: The BAA “will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms.” And it added, “Unit labour costs are also rising briskly, with productivity growth remaining subdued.”

Markets reacted to the surprise hawkishness: The ASX 200 stock index dropped 1.2% in a mini rug-pull, and the Australian dollar rose by 0.7% against the USD. Since the first un-pause hike in May, the AUD has risen by 3.2% against the USD.

And QT continues. The RBA’s holdings of Australian-dollar-denominated securities (this excludes gold and foreign currency holdings) has dropped by nearly 10%, or by A$55 billion, from the peak in March 2022 to A$516 as of the last balance sheet on May 31.

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  44 comments for “Reserve Bank of Australia, First Central Bank to “Pause” then “Un-Pause,” Hikes Again, Warns of More Hikes. QT Continues

  1. jon says:

    Thanks WR for this report and it is a decent move by RBA.

    But, they’d have shown their serious commitment by hiking 50bps not piddly 25bps.

    If they paused and hiked again, it means that inflation is deep entrenched meaning 50bps shock not 25bps shock.

    Hope FED does the same but as I said earlier, we all know these CBs work for the asset holders, not for the common people.

    • Leo says:

      +1, I guess all central banks realize that they are now at a point of no returns wrt economic fundamentals. Hence more faking to protect the fake Asset prices.

      Wallstreet is boldly calling Fed bluff with 30% Nasdaq rally. Looks like Fed will play ball with another lip service 0.25% hike or none at all. Now thats <= 2% per year. So the 10 year vision is to rates at 25% chasing an inflation of 30%.

      Seems like it will workout for the 1%.

      • Depth Charge says:

        The entire goal of this money-printing endeavor was to juice the asset prices and net worths of the already obscenely wealthy, and to inflate away the debts of the biggest credit bubble in the history of mankind. They are continuing with that goal in mind.

      • Mark says:

        “Seems like it will workout for the 1%”

        As always ……

    • Pea Sea says:

      At least it’s a hike. By all indications, the Fed in the US is getting ready for a pause or a “skip”–just as animal spirits, not content merely to run drunkenly rampant in the streets, are beginning to overturn cars and set trash dumpsters on fire.

    • Mike Herman Trout says:

      The RBA does meet monthly unlike the Fed so perhaps that is a factor here…

    • Juliab says:

      Bank of Canada raises policy rate 25 basis points, continues quantitative tightening.

      It follows Australia’s central bank in abandoning a pause in interest rate hikes

  2. Random Intime says:

    Doesn’t look like they are doing much of QT. Central banks are under illusion that some how this inflation scare passes and they can continue maintain large balance sheets to support elevated asset prices. After all new theory is asset prices drive economy.

  3. Flea says:

    Inflation is 7% ,and interest rates are 4.1% .Is this a comedy show . Even commoners know it’s a joke

    • jon says:

      It’s not a joke.
      This is basically ripping common joe out of their purchasing power.

      US stock market is all time high in 2023 and gained quite a bit of ground from October lows. Stock market along with other asset market knows that FED is bluffing people by saying that they are serious about taming inflation.
      If FED is really serious then they’d raise rates by 50bps, not pause not even 25 bps.

      This is all happening by design.

    • Rchadz says:

      IN Australia the Fairwork (Labor) commission just awarded a 5.75% increase in the minimum wage (with some of the lowest workers to get 8% inceases). Many companies (like mine) use this as a marker for annual wage increases. How can you expect to get inflation down below 3% when wage inflation is nearly 6%.

  4. Not Sure says:

    They’re running interest rates that are way lower than pre-GFC, and still one-ish percent lower than 2012. Still lower than actual boots-on-ground inflation. Balance sheet reduction is a pathetic 10% from peak, but most of that happened earlier in 2022… Their QT has been mostly flat for the past year.

    .25% interest hikes won’t do much when the real problem is simply too much money floating around in the system. Same ol’ smoke & mirrors. Anybody with a brain should be unimpressed by such anemic QT. Either we remove money at a sufficient rate or suffer however many years of whack-a-mole hot inflation are required for the buying power of currency to reach equilibrium with its supply. Simple.

    The mesa-shaped balance sheet graph should tell us how serious Austrailia’s central bank is about fighting inflation.

    • Djreef says:


    • Depth Charge says:

      The FED is still “letting it run hot.” This is how they transfer wealth from those who have almost none to those who already have most of it. They will slow boil the working class and the poor for years, to render every last penny out of them.

      • Gattopardo says:

        I can’t be sure, but I seriously doubt that is their intent. Oh yes, it may work out that way indeed.

      • Maximus Minimus says:

        Sounds like a conspiracy theory backed up by facts.

      • Mark says:

        “They will slow boil the working class and the poor for years, to render every last penny out of them.”

        Wow This is poetry of the highest order ……

  5. SoCalBeachDude says:

    Why is there any ‘surprise’ in RBA increasing their rate at all?

    • NYguy says:

      Its a surprise when governments do anything favorable for the average citizen, thats why. Virtually every single move since the late 90s has been to treat people more like cattle to be slaughtered.

  6. Yort says:

    Per article: ” inflation has moved into wages that are surging to keep pace with rising consumer prices, but without matching productivity gains.”

    Productivity charts are concerning, as how do we “grow” our way out of historically higher debt and higher inflation with productivity falling/flatlining?

    Causes of productivity decline are numerous. Tech has been stated as the productivity savior, yet tech has caused some productivity issues in the process.

    First we have the Internet to surf while at work in an office, then we have the smart phones so everyone can surf while doing any job on the planet. This, from my experience of hiring people, is a real focus and productivity destroyer. Plus the seven second attention span of our current era is tech driven, and not great for focus and productivity.

    Beyond tech negative feedback loops, are we seeing peak “productive” technology, did we hit peak intelligence already? Perhaps more people, somewhat wisely, are living to work versus working to live?

    Productivity trends would be a great future article. If A.I. hype turns into reality, perhaps that increases productivity some, yet then we have job losses to deal with so kind of catch 22-ish?

    • SomethingStinks says:

      Here’s how you visualize AI. Put on Madagascar 3, Europe’s most wanted. Fastforward to the part where they are getting chased by captain Dubois, on top of the building. A getaway plane appears. That plane is AI.

    • Herpderp says:

      Productivity will continue to crash as people realize theres no reward to working.

      • BP says:

        I read years ago that the fiscal cliff for a single parent of two was about $50k, meaning that a job would need to pay at least that for it to be worth more than living on government assistance. This was long before the pandemic, so I can’t imagine what that number would be today.

      • Einhal says:

        Yes. The “great resignation” and “quiet quitting” is a result of people just giving up. People work to get the money to live a decent life. If they can’t afford a decent life after working, they’ll just give up and hope for the best. Printing money does that. It basically gives what other people have to work for to favored people for free.

      • 91B20 1stCav (AUS) says:

        …re: ‘productivity’-if ‘heads I win, tails, you lose’ is the essential OS presented to labor by ‘capital’ for long enough, it will vote with its feet (happened in the RE…).

        may we all find a better day.

      • every soul gets what it has earned says:

        Not true. That’s the mistaken belief of the money printing currency debasers. Truth is you reap what you sow/you get what you give. Start following that and your cup will runneth over.

  7. Occam says:

    Real rates are now at negative 2.9% in Australia. 25 basis points will tighten financial conditions for about two days and represent “doing something about inflation” without really doing anything. The 2% inflation theory of price stability is very likely being gradually abandoned in the West for a 4% theory. It will be justified on a full employment basis while it actually reduces real government debt burdens.

  8. Logan Kane says:

    How can people see the RBA do this and then ramp up bets for a Fed pause in June? These central bankers all talk to each other, I think the Fed just wanted cover to pause if there was debt ceiling drama without it looking political.

    They have to go 25 bps here! Inflation has accelerated everywhere they try to pause, the market already has little to no respect for the Fed so this is an easy way to wrest it back.

    • Wolf Richter says:


      Nice piece you posted the other day on Seeking Alpha on this angle.

      • Logan Kane says:

        Thanks Wolf! Sending a few readers your way today as well, linked to some of your work on oil demand.

      • NBay says:

        So I read your pal’s article (you get one free one at Seeking Alpha, it was good, but it also led me to this, which I never knew. Why it is never mentioned is beyond me, but in the interest of learning (why I come here) I hope you will post it.
        The similarity to “The Apprentice” and Trump will no doubt be thought of by many.
        Logan is a lot like Wolf, I see why they see eye to eye. Also a good man to learn from.

        From a podcast discussing a book who’s name I forgot, but the podcast is worth reading as it shows how our own government became the “bad guy” in the eyes of so many and why. A question that always puzzled me. Hope this is allowed, there isn’t much comment here, anyway.

        -So many Americans know that before Reagan became a politician, he was a Hollywood actor. He had starred in a bunch of B grade movies, some of them with chimpanzees, but most people don’t know how he segued from being a sort of second rate actor, to being one of the most successful politicians of the 20th century. And a large part of the answer to that has to do with his job at the General Electric Corporation. So in the late 1950s, Reagan goes to work for GE. GE had a television show called General Electric Theater, which they hired him to host. And each week, this television show, which was extremely successful, it was one of the three most successful television programs in the late 1950s, presented didactic stories of individual success, of people pulling themselves up by their bootstrap and succeeding by the dint of their own hard work, of boys learning to be a man by standing on their own two feet, and Ronald Reagan was the host of this series.

        So he would introduce the show each week and at the end, thank everyone for watching. And so, through this, his voice, his face was beamed into millions and millions of American homes every week for several years. So he became one of the most well-known people in the United States at that time. But in addition, hosting GE Theater was only half his job, the other half was serving as a public spokesperson for GE. And he went on the lecture circuit, particularly in GE communities, going to GE factories, manufacturing plants, giving talks in schools, in communities where there was a GE factory, doing a dinner at the Rotary or the Lions Club. And then all of this would be covered in GE publications. So GE had a whole set of magazines and newsletters where they would feature Reagan’s speeches and then these would be distributed broadly in GE communities. And in doing this work, he also was given a reading list.

        So GE had a massive propaganda campaign, an internal campaign, designed to persuade its managers and its workers of the virtues of free enterprise and also deeply, deeply anti-union, to try to persuade GE workers not to join unions. And they engaged in a lot of union busting tactics for which they actually were cited by the National Labor Relations Board.

        So, Reagan becomes part of this deeply anti-government, deeply anti-union ideology at General Electric, and he becomes the spokesman, the public spokesman for those views. And what we see is that by the time he finishes his tenure at GE, he now has accepted those views. So he comes out with a completely transformed ideology, having previously been a pro-union Democrat, he comes out an anti-union, anti-government Republican, but he also leaves GE with one other really crucial resource, and that’s a set of backers, of wealthy corporate backers who finance his campaign for governor in California and also help him hire a kind of kitchen cabinet, a team of experts who then advise him on a whole set of issues that he previously knew nothing about. And this enables him to make this transition from second rate actor to first rate politician.

    • Depth Charge says:

      “They have to go 25 bps here! Inflation has accelerated everywhere they try to pause, the market already has little to no respect for the Fed so this is an easy way to wrest it back.”

      25 basis points does nothing. The idea that such a chintzy rate hike will “wrest back” respect for the FED is laughable.

    • Pea Sea says:

      The Fed has had chance after chance after chance after chance after chance to wrest back respect from the market. They never take it. Why would they do so now?

    • Some Guy says:

      Wolf mentions RBA as the first central bank to pause, but technically the Bank of Canada paused first in March. But as of today they have un-paused as well.

      And unlike Australia, inflation is actually lower in Canada than the U.S. Given the BoC hiking, it seems extremely unlikely that the Fed won’t do the same.

  9. Jim says:

    Australia will needs this……after beating the Dutch record for avoiding recession.

    We need to let the business cycle bring harmony.

    The whole economy is based off ‘holes (mining’ and houses.’

    If world demand drops for commodities, and interest rates stay high…..we’re in for a much overdue recession (think 90-92).

    Australia will survive, real things will rebound. We’ll import more immigrants….

    The country doesn’t have Europe’s or America’s structural problems

    • matt says:

      I’m sitting in the beautiful winter sunshine of the Gold Coast right now. Australia looks pretty healthy to me.

  10. Micheal Engel says:

    1) Dow 1D : The Dow flipped up On May 31 for funfunfun…
    2) Dow 1W : there is no close above/below Dec 12 2022 hi/lo.
    3) Dow 1W : Aug 15 2022 hi/lo : the Dow paused slightly below.
    4) Dow 1M : if the Dow flip up in June 2023 what will the Fed do and when
    to stop this madness…

  11. Micheal Engel says:

    5) Bloomberg : Lisa and Sassover funfunfun.

  12. PaulT says:

    The RBA has an issue with the US/AUD exchange rate as well. Too much divergence results in AUD sinking and indirectly imported goods prices are further inflated. It makes the RBA a follower of US interest rates trends IMO.

  13. Escierto says:

    If you look at a chart of the AUD vs the USD, you can see that back in May, 2013 the Australian dollar was actually worth a few cents MORE than a US dollar. Since then it’s been a downhill slide until it’s now worth only 67 cents. My question is why? Is it based on any valid economic data? Is it just sentiment? I don’t understand why it declined so much in the past ten years.

  14. medial axis says:

    Seems to me the tail’s wagging the dog, re CB’s controlling inflation.

  15. Redneck_Millionaire says:

    During the lockdowns, money printing, almost 0% percent interest, all I kept thinking was how we let this happen? There will be an unbelievable price to pay for this. The newly printed 4 trillion for America aint gonna be enough. Higher for longer is here to stay. What do we want? The new dot plot.

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