(Aug 10): Australia’s central bank is poised to keep interest rates unchanged for a second straight meeting on Tuesday, while restating its readiness to tighten policy further in order to tackle stubbornly strong inflation.
The Reserve Bank’s rate-setting board will hold the cash rate at 4.35% when it announces its decision at 2:30pm in Sydney, economists and traders reckon. Both will closely scrutinize the release and updated quarterly forecasts for any indications that the board is done after 75 basis points of hikes this year or genuinely willing to tighten further.
It will be a similar story at RBA governor Michele Bullock’s press conference that takes place an hour after Tuesday’s rate announcement.
“Our central expectation is for a hawkish hold,” said Carl Ang, fixed income research analyst at MFS Investment Management, while adding he still sees a slight chance of a move given the persistence of price pressures. The RBA’s closely watched trimmed mean gauge has remained above the midpoint of its 2-3% target since late 2021.
“In short, disinflation is proceeding too gradually to close the door on further tightening in the current cycle,” Ang added.
Economists expect the RBA will remain on a prolonged pause through this year and much of next. On Tuesday, they will look at the updated forecasts in the quarterly Statement on Monetary Policy to see how the RBA is assessing the outlook.
Commonwealth Bank of Australia’s Belinda Allen expects the RBA will slightly bring forward the timing of inflation’s return below 3% and anticipates the jobless rate forecast will be revised higher.
Unemployment is currently 4.4%, compared with the RBA’s May forecast of 4.2%, though the past two reports showed strong hiring. The prior estimates were based on an assumed cash rate of 4.7% by year’s end.
The central bank will retain its “hawkish tone for now until we see actual evidence the economy is slowing and inflation is coming back down,” said Allen, head of Australia economics at CBA, which doesn’t expect a rate adjustment for the rest of the year.
Money markets are pricing around a 60% chance the RBA will hike by December.
The three straight rate rises this year signaled the RBA’s determination to ensure inflation doesn’t get away from it again. In doing so, it unwound the same amount of easing delivered last year. But the challenge is significant: Australia’s core inflation is among the highest in major developed economies.
Elsewhere, European Central Bank officials are prepared to raise borrowing costs in September unless the inflation outlook improves markedly. New Zealand’s central bank hiked last month and signaled potential for more to come to drive inflation to target. In contrast, the Federal Reserve stood pat for a fifth straight meeting, though three dissenters voted for a quarter-point hike.
Australia’s stance is clouded by a deteriorating housing market in response to the rate hikes and budget tax changes. The home-price drop has been led by Sydney and Melbourne, which are down 5.3% and 5.5% respectively from their peaks. Yet underscoring how high prices had risen, the median value of a Sydney dwelling is still A$1.24 million (US$870,000 or RM3.5 million).
Australian policymakers will be monitoring the impact of the so-called wealth effect, whereby changes in asset prices — particularly housing but also shares — influence how much households consume and borrow.
“The RBA is likely to retain a tightening bias and we expect one more rate hike by year end as inflation is still too high and likely to take too long to get back to target, threatening higher inflation expectations,” said Shane Oliver, the veteran chief economist at AMP Ltd.
“So, relief on the interest rate front is still a fair way off.”
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