Australia’s apex bank holds rates

Australia’s central bank, in a closely watched decision on Tuesday, chose to hold its official cash rate steady at 4.10%. The move comes after economists were divided on expectations, with some predicting a 25 basis point hike, while others anticipated the central bank to keep rates unchanged.

The decision was greeted positively by the stock market, with the S&P/ASX 200 rebounding from earlier losses and rising by 0.5%. However, the Australian dollar weakened slightly against the U.S. dollar, settling at 0.6652.

The central bank, in its statement, expressed the view that inflation in the economy had “passed its peak.” RBA governor Philip Lowe emphasised that while some further tightening of monetary policy might be necessary to bring inflation back to target, it would depend on how the economy and inflation evolve.

Lowe also acknowledged that inflation remained elevated and would continue to do so for some time. The Australia Bureau of Statistics’ monthly inflation indicator indicated a slight cooling in May, with prices rising by 5.6%, mainly driven by housing prices, food, and non-alcoholic beverages.

The economy’s consumer price index increased by 7% in the first quarter of 2023 after peaking at 8.4% in December.

The decision to keep interest rates steady this month allows the central bank more time to assess the state of the economy, economic outlook, and associated risks, according to Lowe. The bank will closely monitor global economic developments, household spending trends, and inflation forecasts.

IG’s Australia market analyst, Tony Sycamore, suggested that the decision to maintain rates was driven by the need to assess the impact of cumulative rate hikes over the past fourteen months.

The central bank governor’s statement indicated that wage growth was still consistent with the inflation target, provided productivity growth improves.

Looking ahead, analysts are closely watching the next consumer price index report, with the recent data flow being mixed. Some experts believe this allows the central bank room to potentially slow down its hiking cycle in response to the current economic landscape.