RBA Pushes Back Against Near-Term Rate Cut on Inflation Risk

(Bloomberg) -- Australia’s central bank kept interest rates at a 12-year high and all-but ruled out a rate cut in the next six months, splitting with global counterparts as it waits for inflation to abate.

The Reserve Bank held its cash rate at 4.35% for a sixth straight meeting on Tuesday and lifted its forecasts for inflation and economic growth. In her press conference after the policy decision, Governor Michele Bullock said there’s still a risk that inflation will take too long to return to target and said it’s too early to be talking about imminent easing.

“The market path at the moment is pricing in interest rate reductions by the end of this year,” the governor said. “The board’s feeling is that in the near term, by the end of this year, in the next six months, given what the board knows at the moment and given where forecasts are — that doesn’t align with their thinking about interest rate reductions.”

The currency climbed as much as 0.7% against the dollar after Bullock’s comments. Money markets pared bets on a November rate cut while fully pricing one for December.

The RBA is aiming to bring down consumer prices while holding onto significant employment gains made since the pandemic.

“A largely hawkish hold from the RBA,” said Dwyfor Evans, head of APAC Macro Strategy at State Street Global Markets. “Some of the optimism borne of weaker Q2 inflation has been largely discarded in favor of commentary that continues to see underlying inflation data as ‘too high’.”

“We still consider the RBA as a G10 laggard in terms of normalizing interest rates,” he added.

The decision comes a week after data showed core inflation unexpectedly decelerated in the second quarter and central banks abroad either reduced rates or signaled an intention to do so.

Bullock on Tuesday pointed out that Australia hasn’t hiked as much as its counterparts and underlying CPI is only expected to return to the 2-3% target in late 2025. On Tuesday, the RBA upgraded its forecasts for both core inflation and economic growth, citing stronger demand.

It now sees underlying inflation easing to 3.5% by the end of this year, and then hitting 3.1% in mid-2025. The gauge is seen falling just shy of the 2.5% target mid-point at the end of the forecast horizon.

More Hawkish

“It’s interesting that they revised up their inflation forecasts and pushed out the trimmed mean to return to midpoint but they still didn’t sound more hawkish in the statement,” said Diana Mousina, deputy chief economist at AMP Ltd in Sydney. “To me it’s a signal that another rate rise would be a big stretch. Something would need to dramatically change in the outlook for them to raise rates again.”

The governor did tell reporters that the board discussed a hike before deciding to pause again and said a tightening couldn’t be ruled out due to upside risk to inflation.

Bullock had said she needs to be confident price growth is moving sustainably back to the bank’s goal. She received a reprieve last week when inflation came in better than expected.

Still, at 3.9% core prices remain well above the bank’s target, driven largely by non-discretionary spending such as insurance, education and housing rent.

What Bloomberg Economics Says...

“While the central bank’s tough rhetoric suggests little appetite for cuts in coming months, the detailed outlook suggest a path to potential easing in 4Q24 remains open.”

— James McIntyre, economist

For full note, click here

Australia’s more cautious stance has put it down the back of the global easing cycle. The Bank of Canada cut its benchmark rate by 25 basis points in June, making it the first G-7 central bank to enter an easing cycle.

The European Central Bank soon followed as did the Bank of England, while the Federal Reserve has signaled it’s on course to begin easing in September.

The governor said she didn’t feel any “peer pressure” as her counterparts cut rates, pointing out they had hiked more than the RBA. She also said the floating exchange rate gave Australian policymakers some flexibility to take a slightly different path.

Bullock said the board was briefed on the financial market ructions triggered by a weaker US employment report on Friday.

“It was really just to understand what was going on, what were the reasons for it,” she said. “There was a bit of a feeling that it was a bit of an overreaction in some ways.”

--With assistance from Shinjini Datta, Matthew Burgess and Chris Bourke.

(Adds comments from governor, updates markets.)