Australia Holds Key Rate at 12-Year High on Inflation Fears

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(Bloomberg) — Australia’s central bank kept interest rates at a 12-year high as it waits for sticky inflation to abate before signaling any move toward joining global peers in easing.

The Reserve Bank held its cash rate at 4.35% for a sixth straight meeting on Tuesday and restated that it isn’t “ruling anything in or out” on policy. The RBA aims to bring down consumer prices while holding onto significant employment gains made since the pandemic.

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“Policy will need to be sufficiently restrictive until the board is confident that inflation is moving sustainably towards the target range,” the rate-setting board said in a statement.

The Australian dollar edged higher while the yield on policy-sensitive three-year bonds pared an earlier fall immediately after the decision as traders trimmed bets on aggressive rate cuts this year. 

Governor Michele Bullock will hold a press conference at 3:30 p.m. Sydney time.

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. That’s prompted money markets to boost pricing on an RBA cut this year.

“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.

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Bullock has repeatedly pushed back against speculation of near-term easing, reflecting forecasts that core inflation will only 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. 

Bullock has 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.

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. 

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“Globally, financial markets have been volatile of late and the Australian dollar has depreciated,” the RBA said in its statement. “Geopolitical uncertainties remain elevated, which may have implications for supply chains.”

Another unknown factor is the impact of income-tax cuts and cost-of-living rebates on power bills that began on July 1. Economists say the measures will help shore up a weakening economy while Bullock recently said she didn’t anticipate they will have a material impact on the RBA’s inflation forecasts.

—With assistance from Shinjini Datta and Matthew Burgess.

(Adds comments from statement, analyst, updates market.)

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