May 7 2024: Australia’s central bank, the Reserve Bank of Australia (RBA), announced on Tuesday that it would maintain interest rates at the current level for the sixth consecutive month, citing concerns about inflation risks despite the economy’s robust performance.
RBA Governor Michele Bullock emphasized that the current interest rate setting of 4.35% was appropriate, aiming to keep inflation within the target range of 2-3% by late 2025. However, she expressed vigilance regarding potential upward pressure on prices, indicating a cautious approach to monetary policy adjustments.
The decision surprised financial markets, leading to a 0.5% decline in the Australian dollar to $0.6587, while three-year bond futures saw an 8-tick rally to 96.06. Market expectations for another rate hike this year plummeted to just a 13% probability for September, down from 43% earlier in the day.
Despite discussions within the board about raising rates, the RBA opted to maintain its current stance due to ongoing inflation challenges and a gradual labor market improvement, with the unemployment rate at 3.8% in March.
Bullock’s comments reflected a divergence from more hawkish forecasts within the bank, projecting inflation to reach 3.8% and remain elevated until the end of the year, assuming no rate cuts until mid-2025.
ANZ’s head of Australian economics, Adam Boyton, noted that the RBA’s less hawkish language and upward inflation revisions suggest a higher hurdle for future rate hikes, with expectations leaning towards a potential easing cycle starting in November, albeit with risks of delay.
The global landscape also adds complexity, as other central banks worldwide grapple with inflation challenges, impacting the outlook for future rate adjustments. The Federal Reserve, for instance, has scaled back expectations for rate cuts in 2024 from initial projections earlier in the year.
Australia’s upcoming annual budget statement is eagerly awaited, with pressure mounting on the government to implement measures addressing inflation concerns and fiscal responsibility.