Australia’s central bank kept its key interest rate unchanged on Tuesday following a cooling of inflation pressures and weaker household spending, while keeping the door ajar to future hikes.
(Bloomberg) — Australia’s central bank kept its key interest rate unchanged on Tuesday following a cooling of inflation pressures and weaker household spending, while keeping the door ajar to future hikes.
The Reserve Bank left its cash rate at 4.1% for a second straight meeting, wrongfooting a majority of economists but in line with market expectations. The longer pause suggests the RBA may be approaching the end of its tightening cycle and sent the currency down to 66.68 US cents, while the rate-sensitive three-year government bond yield fell to the lowest since June 7.
“The statement erred modestly dovish,” said Su-Lin Ong, chief economist at Royal Bank of Canada. “The hurdle to hike further is high and the onus is on key data to surprise to the upside.”
Governor Philip Lowe has put the RBA into data-dependent mode, monitoring consumer spending, labor costs, business surveys and inflation for guidance. Figures last week showed a lower CPI and a surprising fall in retail sales, while data from Equifax indicated a rising trend of missed mortgage payments.
Tuesday’s decision highlights the RBA’s more cautious approach to policy compared with the Federal Reserve, which last week raised by a quarter-point to take its cumulative rate increases to 5.25 percentage points.
That’s well ahead of 4 percentage points in Australia and partly reflects the rapid pass-through of hikes to the nation’s borrowers, who are mainly on floating-rate mortgages whereas most in the US are on 30-year fixed rates.
Even so, Lowe maintained his tightening bias, highlighting ultra-low unemployment of 3.5% and still-high consumer prices. Core inflation at 6% is double the top of the RBA’s 2-3% target.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data,” Lowe said in his post-meeting statement.
The board also reviewed the RBA staff’s latest economic estimates which showed inflation easing to around 3.25% by the end of 2024 and falling back to within the target in late 2025. GDP growth is seen at around 1.75% over 2024 and unemployment is forecast to rise to around 4.5% by late next year.
“The Australian economy is experiencing a period of below-trend growth and this is expected to continue for a while,” Lowe said. “Household consumption growth is weak, as is dwelling investment.”
The full suite of forecasts will be released in the RBA’s quarterly Statement on Monetary Policy on Friday.
What Bloomberg Economics Says…
“That might be it from the RBA. The window for further tightening is closing as earlier hikes work their way through the economy, crimping demand while the labor market loosens up.”
— James McIntyre, economist
For the full note, click here
The long and variable lags associated with monetary policy are another reason the RBA is moving cautiously. The ongoing expiry of a batch of home loans fixed at record low rates during the pandemic remains a cloud on the horizon.
Lowe has acknowledged the path to a soft landing is “narrow,” while reiterating that the bank will do what it takes to bring inflation back to target.
“The RBA’s narrow path to a soft landing remains precarious, but it’s certainly possible,” said Harry Murphy Cruise, an economist at Moody’s Analytics.
–With assistance from Tomoko Sato, Georgina McKay and Garfield Reynolds.
(Adds comments from economists.)
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