Reserve Bank of Australia Keeps Interest Rates on Hold

Blank one dollar coins are seen on a conveyor belt at the Royal Australian Mint in Canberra, Australia on Sept. 2, 2020. (AAP Image/Mick Tsikas)

The Reserve Bank of Australia (RBA) board has left interest rates on hold at 4.35 percent, in a decision widely tipped by economists.

The board is determined to return inflation to target within a reasonable timeframe, but noted it is still going to take some time yet.

Board members remarked inflation is easing, but it has been doing so more “slowly than previously expected and remains high.”

“The board expects that it will be some time yet before inflation is sustainably in the target range. While recent data have been mixed, they have reinforced the need to remain vigilant to upside risks to inflation,” the RBA said.

They noted the path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and they are not ruling “anything in or out.”

“The board will rely upon the data and the evolving assessment of risks. In doing so, it will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market,” the RBA said.

“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

Inflation Proving ‘Persistent’

The RBA board noted inflation had fallen greatly since the peak in 2022 with higher interest rates working to bring demand and supply closer to balance.

However, the pace of decline has slowed in the most recent data, the RBA highlighted, with inflation still some way above the 2 to 3 percent target range.

“Over the year to April, the monthly CPI indicator rose by 3.6 percent in headline terms, and by 4.1 percent excluding volatile items and holiday travel, which was similar to its pace in December 2023,” the board noted.

“Broader data indicate continuing excess demand in the economy, coupled with elevated domestic cost pressures, for both labour and non-labour inputs.”

The board said conditions in the labour market alleviated in the past month but remain tighter than is consistent with “sustained full employment and inflation at target.”

“Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth. Recent data revisions suggest that consumption over the past year was stronger than previously suggested,” the RBA said.

Reaction to Rates Decision

AMP head of investment strategy and chief economist Shane Oliver said the RBA held rates as expected but its commentary lent hawkish amid excess demand, persistent service inflation, and inflation overall easing more slowly than previously expected.

“We still see the next move as down, but near term risks still on upside,” he said.

Meanwhile, City Index APAC Market analyst David Scutt pointed to the RBA’s words they will do whatever is necessary to return inflation to target, quipping it “doesn’t across as moving away from hiking.”

He said it looks like the RBA’s tolerance for further upside surprises in inflation may be starting to wear thin.

“While recent data have been mixed, they have reinforced the need to remain vigilant to upside risks to inflation,” he said. 

Ahead of the decision, all four major banks had predicted the cash rate would be left unchanged.

In a research note in the morning on June 18, ANZ economists said they expect rates to remain on hold in both Australia and Europe.

“Although some central banks have started to cut, it is an almost universal theme that central banks need to see further progress on services and core inflation before having the confidence to embark on a sustained easing cycle,” economists said.

“Patience remains the watchword. But it’s not all about the inflation data. Central banks are also paying close attention to labour market trends and aggregate demand.”

Similarly, National Australia Bank, Commonwealth Bank, and Westpac economists also said ahead of the rate decision that they expected the cash rate to remain unchanged.