Aug 6 2024: On Tuesday, Australia’s central bank ruled out the possibility of an interest rate cut this year, citing slow progress in reducing core inflation. The Reserve Bank of Australia (RBA) held interest rates steady at 4.35% for the sixth consecutive meeting.
Following the announcement, the Australian dollar rose by 0.3% to $0.6517. Three-year bond futures also declined, dropping 29 ticks to 96.4, as market expectations for a rate cut in November were reduced from 88% to 55%, though a cut by December remains fully anticipated.
The RBA’s decision to keep rates unchanged reflects its stance that current policy must remain sufficiently restrictive to ensure inflation returns to target levels. The bank emphasized that it is not considering any policy changes at this time.
Markets had largely anticipated a steady outcome, given the recent cooling of core inflation and the volatile global market conditions. However, RBA Governor Michele Bullock stated that the board had considered raising rates but determined that the current policy was appropriate for now. She cautioned that markets may have overestimated the likelihood of a rate cut in November.
“Based on the board’s current view, a near-term reduction in the cash rate does not align with our thinking,” Bullock said. “We need to see further declines in underlying inflation, as prolonged high inflation adversely affects everyone.”
Since May 2022, the RBA has raised interest rates by 425 basis points. Despite this, inflation, which was 3.8% last quarter, remains above the RBA’s target range of 2-3%. Underlying inflation stood at 3.9% last quarter and is expected to decrease more slowly than previously anticipated. However, headline inflation is projected to fall within the target range early next year, aided by government energy rebates.
Adam Boyton, head of Australian economics at ANZ, noted that the RBA’s current tone appears more hawkish compared to previous statements. He expects the first rate cut to occur in February next year, suggesting that a rate cut this year would require a more significant deterioration in economic conditions.
The RBA’s approach contrasts with other central banks, such as the Federal Reserve, which is expected to cut rates in September, while the European Central Bank and the Bank of England have already eased their policies.
Bullock also mentioned that recent market volatility was noted but did not influence the rate decision. “Policy will remain sufficiently restrictive until we are confident that inflation is moving sustainably towards the target range,” the RBA stated in its post-decision statement.