Australia’s Central Bank Maintains Rates, Slightly Eases Hawkish Stance

By Stella Qiu and Wayne Cole

SYDNEY – Australia’s central bank reaffirmed on Tuesday that interest rate cuts are not expected in the near future as it maintained its current policy stance. However, the bank softened its previously hawkish tone, indicating that discussions on monetary tightening were not on the agenda.

Governor Michele Bullock stated that the board did not actively contemplate raising rates and discussed the potential need to adjust its hawkish messaging instead. Following Bullock’s remarks, the Australian dollar reached a nine-month high of $0.6869 before dipping to $0.6820. Futures trading indicated a slight increase in the likelihood of a 72% chance for a rate cut by the end of the year.

In its September policy meeting, the Reserve Bank of Australia (RBA) held rates steady at a 12-year high of 4.35%, emphasizing that policy must remain sufficiently restrictive to drive inflation back to target levels.

“While headline inflation will decline for a time, underlying inflation is a stronger indicator of inflation momentum and remains too high,” the board stated in a message largely consistent with its August commentary. “Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range.”

Market participants largely expected this decision, particularly given the stickiness of underlying inflation and a surprisingly resilient labor market. During her post-meeting press conference, Bullock clarified that the board did not “explicitly” consider a rate hike.

“The board discussed whether or not the messaging should change, but it is clear from our communication that, in the near term, we do not foresee interest rate cuts,” Bullock stated.

The RBA has maintained steady rates since November, deeming a cash rate of 4.35%—a significant increase from the record-low 0.1% set during the pandemic—restrictive enough to influence inflation towards the target range of 2-3% while safeguarding employment growth.

With underlying inflation at 3.9% in the last quarter and job creation remaining strong, there seems to be little urgency to ease monetary policy in a manner similar to the Federal Reserve’s recent action of cutting rates by 50 basis points to mitigate job losses.

Political pressure is building for a rate reduction, particularly from the left-wing Greens, who recently called on the government to facilitate a rate cut in exchange for their support in passing delayed reforms affecting the RBA.

“While the RBA did not explicitly consider a rate hike due to a lack of significant changes since the last meeting, its language still leans slightly hawkish,” remarked Shane Oliver, chief economist at AMP. “We anticipate that rates have peaked, with the first cut expected in February next year. However, a rate cut could occur by year-end if unemployment rises more sharply and underlying inflation decreases significantly.”

Market sentiment in Australia improved on Tuesday, buoyed by additional stimulus measures from China’s central bank, which announced cuts to reserve requirements and lending rates.

Investors are now awaiting the release of monthly inflation data for August on Wednesday. Headline inflation is projected to slow to an annual rate of 2.7% due to government electricity rebates, although the core figure may still reflect persistent price pressures.

“If tomorrow’s inflation figure shows a number beginning with ‘two’, indicating it falls within the target band, it does not mean we have inflation under control,” Bullock cautioned, signaling that the RBA is not in a hurry to modify its policy stance. “It doesn’t mean that inflation is sustainably back within the band.”