RBA holds rates at 4.1%

The Reserve Bank of Australia (RBA) has decided to keep its interest rates unchanged at 4.1% for a second consecutive month, giving the central bank more time to evaluate the impact of previous rate increases. However, the RBA issued a warning of potential future rate hikes as inflation in Australia remains elevated.

In the second quarter, inflation in Australia eased to 6% from 7% in the first quarter, but it still significantly exceeds the RBA’s target range of 2% to 3%. The decision to hold rates steady was met with diverging opinions among economists, with a slight majority expecting a 25-basis point hike.

Governor Philip Lowe stated that the higher interest rates have been effective in establishing a more sustainable balance between supply and demand in the economy and will continue to do so. He emphasized that the uncertainty surrounding the economic outlook prompted the decision to maintain rates at their current level. The RBA aims to assess the impact of the recent rate increases before making further adjustments.

Following the announcement, the Australian dollar experienced losses against the dollar, trading down nearly 0.7% at about 0.67 to the dollar during afternoon trading in Asia.

Over the past year, the RBA has raised interest rates by a cumulative 400 basis points, reaching the highest level in 11 years. The country has grappled with surging inflation as economic activity rebounded after the peak of the Covid-19 pandemic.

While the RBA maintains a tightening bias, analysts believe the hurdle for additional rate increases is high. Economists from the Commonwealth Bank of Australia noted that it would require an upside surprise in economic data, particularly in prices and wages, for the RBA to shift its outlook.

In his August policy statement, Governor Lowe highlighted several significant uncertainties, including the time lag for policy effects in the real economy and the response of firms’ pricing decisions and wages amidst a slowing economy and a tight labor market.

Lowe also pointed out that consumption growth has substantially slowed due to cost-of-living pressures and higher interest rates. The central forecast indicates a gradual decline in CPI inflation, expected to reach around 3.25% by the end of 2024, and to return to the RBA’s target range of 2% to 3% by late 2025.

The RBA governor’s penultimate meeting took place on Tuesday, as he is set to finish his seven-year term in office on September 17. Michele Bullock is expected to succeed him as the new governor. The evolving economic data and risk assessment will determine the necessity of any future tightening of monetary policy to ensure inflation returns to the target range within a reasonable timeframe.