The central bank of Australia kept interest rates steady on Tuesday but did not rule out further increases as inflation remained too high, Reuters reported.
The central bank’s statements boosted the Australian dollar and led futures to push back the probable timeline for the first policy easing to September from August. The Reserve Bank of Australia (RBA) kept rates at a 12-year high of 4.35 per cent during its first meeting this year, but left room for another increase if necessary.
“While recent data indicate that inflation is easing, it remains high… The Board needs to be confident that inflation is moving sustainably towards the target range.”
The central bank slashed its forecasts for inflation and economic growth but emphasised that demand continued to outstrip supply. The Australian dollar rose 0.4 per cent to $0.6512, hitting an 11-week low of $0.6469 overnight. Three-year bond futures fell 5 points to 96.3.
The RBA raised interest rates by 425 basis points from May 2022 to curb persistently high inflation. Although inflation has fallen to a two-year low of 4.1 per cent in the fourth quarter and stands some distance from the 2022 peak of 7.8 per cent, it is still well above target.
RBA Governor Michele Bullock stated at her first press conference under a new reporting system for the rate decision claimed the bank’s board needed to ensure inflation was moving steadily towards target before considering a rate cut.
We haven’t ruled anything out and we haven’t ruled anything in… The optionality here really needs to be maintained because we need to be driven by the data.
CBA’s head of Australian economics, Gareth Aird, suggests that the first rate cut will come in September.
“It will take more than just weak economic growth for the RBA to entertain the idea of policy easing. The unemployment rate will likely need to rise a little more quickly than the RBA anticipates and inflation will need to fall a little faster, and we expect both of those outcomes to transpire.”
The RBA is following the lead of several other central banks by resisting pressure to cut rates prematurely. Economic resilience and comments from the Federal Reserve recently led investors to delay the start of US policy easing from March to June. Luci Ellis, chief economist at Westpac and a former RBA official, said:
We doubt that the [RBA] Board are even thinking about rate cuts yet. We continue to expect the RBA to reach this level of comfort around September.
