Australia’s central bank kept interest rates at 12-year highs in a widely expected move while maintaining a neutral stance that surprised markets and pushed the currency lower.
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(Bloomberg) — Australia’s central bank kept interest rates at their highest in 12 years in a widely expected move while maintaining a neutral stance that surprised markets and pushed the currency lower.
The Reserve Bank kept its key interest rate at 4.35% for the fourth straight day on Tuesday, while it raised its near-term inflation estimates and slightly cut estimates for economic growth and unemployment. The updated forecasts were based on the technical assumption that tariffs will not change until mid-2025.
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Read more: RBA raises short-term inflation forecast and cuts unemployment
“The board expects that it will take some time for inflation to be sustainably within the target range and will remain alert to upside risks,” the RBA said in a statement. “The board doesn’t decide on anything.
The Australian dollar even fell by 0.4% to 65.98 US cents after the decision. The yield on policy-sensitive three-year bonds fell 8 basis points to 3.95% as swap traders withdrew bets on a rate hike this year. Stocks rose.
“Given the inflation surprise in the first quarter, markets likely expected the RBA to revert to its old forecast that a further rise in interest rates cannot be ruled out,” said Alex Loo, macro strategist at Toronto-Dominion Bank in Singapore. “Today’s unchanged forecast likely disappointed hawks as the Australian dollar took a hit and Australian interest rates rose.”
The meeting followed data showing both headline and core inflation beat expectations in the first three months of the year and remained well above the RBA’s target range of 2-3%.
It also follows a much-anticipated decision from the Federal Reserve last week, when Chairman Jerome Powell maintained hopes of a rate cut this year while acknowledging that a burst of inflation had dented confidence that price pressures were easing.
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It looks like the RBA could take a similar route. Bullock had previously said the bank was in data-dependent mode and would only begin cutting rates when it was confident inflation was on track to return to target in a “sustainable manner.”
Su-Lin Ong, chief Australian economist at the Royal Bank of Canada in Sydney, viewed the RBA’s statement as “close to neutral” after the meeting.
Stephen Miller, investment strategist at GSFM in Sydney, said the central bank had “moved from a near neutral bias to something resembling a tightening bias.”
“I would be surprised if the option of a rate hike wasn’t on the table at this week’s meeting,” he said.
While the RBA does not release dot charts or its own interest rate forecast, Governor Michele Bullock has previously indicated that she does not need to wait until inflation is within the band to cut. Still, it has repeatedly pushed back against speculation about easing, echoing RBA forecasts that inflation will only return to target in the second half of 2025.
Read more: RBA cuts 2024 GDP forecast to 1.6%; Inflation at 3.8%
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One of the unknown factors for the central bank is the impact of the government budget, which is due to be passed in a week, as well as the tax cuts that start around mid-year.
“No change in the overall tone of the RBA,” said Devika Shivadekar, an economist at consultancy RSM Australia. “Inflation forecasts have been revised upwards, most likely taking into account the risks of upcoming tax cuts and the federal budget. We remain confident in our view that the RBA will not pivot until it sees two more quarterly inflation data releases.”
Recent data suggests Australia’s overall economy is slowing and per capita GDP is shrinking, while tepid retail sales reflect poor consumer sentiment.
At the same time, the labor market remains tight with an unemployment rate of 3.8%. Data released on Monday showed that the number of job advertisements rose 2.8% in April, 36.5% above pre-pandemic levels.
The resilience of employment has given policymakers confidence that they can engineer a soft landing – reducing inflation while maintaining the huge employment gains of recent years.
– With assistance from Tomoko Sato and Matthew Burgess.
(Adds comments from economists.)
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