Australia’s central bank held its key interest rate at a 12-year high on Tuesday as it struggles to overcome stubborn price pressures that prevent it from joining a global easing cycle.
Article content
(Bloomberg) — Australia’s central bank held its key interest rate in 12 years on Tuesday as it struggles to overcome stubborn rate pressures that prevent it from joining a global easing cycle.
The Reserve Bank – as expected – kept its cash rate at 4.35% for the seventh consecutive meeting and reiterated that it is “neither raising nor lowering” policy. The RBA has sought to hold on to the huge post-Covid job gains and as a result inflation is taking longer to come down.
Advertisement 2
Article content
“The board remains firm in its determination to bring inflation back to its target and will do everything necessary to achieve that result,” the pricing board said in a statement. “Policy will need to be sufficiently restrictive until the board is confident that inflation is moving steadily toward the target level.”
Investors have decided on near-term expectations for an RBA rate cut, with the three-year policy sensitive notes erasing earlier losses to be little changed at 3.55%. The currency rose to its closest level since July 2023. Swaps dealers are pricing in almost even the chance of a rate cut at the December meeting.
“The RBA used the word ‘stable’ four times in the statement to make the point that the imminent fall in rates will not be enough to convince them to cut rates,” said Stephen Spratt, rates strategist at Societe Generale in Hong Kong. . “This appears to be a signal to the markets that they should not read too much into the future CPI data for August, which is forecast to return to the target level.”
Monthly inflation data on Wednesday is expected to show prices falling below 3% for the first time since August 2021, reflecting government subsidies for energy and other measures.
Top Stories
Article content
Advertisement 3
Article content
The RBA’s decision highlights its outlier position compared to peers. Last week, Federal Reserve Chairman Jerome Powell led his colleagues in cutting the rate above the rate designed to maintain the strength of the US economy.
Economists generally expect the RBA’s rate-cutting cycle to begin in February while financial markets see a two-thirds chance of the first rate cut coming in December.
Governor Bullock has also disputed near-term tapering talk, citing forecasts that inflation will only return to the 2-3% target by late 2025. That brought him in line to fire members of the ruling Labor party and smaller parties. who are pushing for a rate cut.
Bullock says the board wants to make sure that price growth returns in a sustainable way to the bank’s goal.
Subscribe to the Bloomberg Australia Podcast on Apple, Spotify or wherever you listen.
At 3.9%, inflation remains well above target, driven largely by non-restricted spending such as insurance, education and housing. Australia’s job market remains in good shape with the unemployment rate at 4.2%.
Advertisement 4
Article content
The RBA’s hawkish policy stance combined with political competition over pending changes to its board structure has fueled local criticism of the bank.
The left-wing Greens want the government to use its reserve power to order the RBA to cut rates as a condition for backing legislation that would split the board into two – one for monetary policy and one for management. The government dismissed the Greens’ proposal as “crazy.”
In a statement on Tuesday, the RBA board highlighted volatility abroad, saying “political uncertainty remains prominent.” That reflects the intense fighting between Israel and Hezbollah as the conflict in the Middle East shows signs of escalating.
One of the factors behind the ongoing price pressure in Australia is the conflict between fiscal and monetary policy, economists say. While government officials helped keep Australia out of recession and improved the labor market, it also made the RBA’s job difficult.
The government has rejected suggestions that its policies are helping fuel prices rise.
Westpac Banking Corp. this week released research showing new public demand rose to 27.3% of the real economy in the June quarter from a pre-pandemic estimate of 22.5%. Economist Pat Bustamante expects the share to reach 28% by the end of next year.
“The increase in public spending as part of the real economy has never been seen at such a speed and scale,” he said.
—With help from Toby Alder, Matthew Burgess and Georgina McKay.
(Adding comments from the analyst, reviewing the markets)
Article content