The governor of the Reserve Bank, Michele Bullock, says she does not see interest rate cuts “in the near term” as the central bank waits for clearer evidence inflation is in retreat before it begins cutting borrowing costs.
The RBA ended its latest two-day board meeting on Tuesday by keeping its cash rate at 4.35%, the level its remained since November. The decision was as economists had expected.
Inflation, the bank said in a statement, was “above target and is proving persistent”, and that bringing it back to within its 2%-3% target range was its “highest priority”.
“To date, longer term inflation expectations have been consistent with the inflation target and it is important that this remain the case,” the statement said, adding “it will be some time yet before inflation is sustainably in the target range”.
Governor Michele Bullock has used recent speeches to stress the bank wouldn’t hesitate to lift interest rates if inflation veered off its trajectory towards an annual pace of 2%-3%.
Weak economic readings – including GDP expanding at its slowest rate since the 1990s excluding the pandemic – have stoked hopes the RBA would soon start cutting its interest rate.
However, on-going strength in the labour market, including the generation of extra 47,500 jobs in August, dimmed that optimism. Prior to today’s decision, investors were betting there was only about a 50-50 chance of a cut in the cash rate to 4.1% by the bank’s final board meeting in December.
Some central banks – with varying inflation targets – have begun cutting interest rates for the first time since the Covid pandemic. These include the US last week, New Zealand and the UK in August, and the European Union in June and September.
The RBA decision comes a day before the Australian Bureau of Statistics releases monthly inflation figures for August, with economists tipping a sub-3% headline pace for the first time in three years. For July, inflation was running at 3.5% in July, or the lowest in four months.
The ABS will provide the more complete inflation data for the September quarter on 30 October, or about a week prior to the RBA’s next board meeting.
Markets took the decision in their stride, with the Australian dollar hovering at about 68.5 US cents and stocks retaining their loss for the day of about 0.3%.
The board indicated it may not read too much into a low inflation result for August.
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“Headline inflation is expected to fall further temporarily, as a result of federal and state cost of living relief,” it said. “However, our current forecasts do not see inflation returning sustainably to target until 2026.”
The RBA board did not consider an interest rate rise at its meeting, Bullock said in her post-decision media conference. That may imply the RBA would need a large inflation surprise to put a 14th rate rise in this cycle back on the table.
The most recent meeting that only a hold decision was considered came in March.
Still, Bullock said progress in bringing down the underlying inflation rate remained “slow” in the present quarter – which only has about a week to go.
Bullock also made clear: “In the near term, [the board] does not see rate cuts.”