The Reserve Bank of Australia (RBA) confirmed on Tuesday that it does not expect to cut interest rates in the near future, as it maintained its monetary policy unchanged. However, it showed flexibility in its traditionally hawkish stance, indicating that the possibility of raising interest rates was not discussed during the meeting.
The central bank governor clarified that the board did not seriously consider a rate hike at this meeting but did discuss whether there was a need to adjust its messaging to the market.
The Australian dollar reached a nine-month high of $0.6869 but later retreated to $0.6820 after the governor’s comments. Futures saw a slight increase as markets re-evaluated the likelihood of a rate cut, which now stands at 72% by the end of the year.
During its September meeting, the RBA kept the interest rate at 4.35%, its highest level in twelve years, while reaffirming that monetary policy needs to remain sufficiently tight to ensure inflation stabilizes within the target range.
The board’s statement noted, “Headline inflation will ease in the near term, but underlying inflation remains at very high levels.” It also stressed, “Monetary policy must remain tight until the board is confident that inflation is moving sustainably towards the target.”
In a press conference following the meeting, the governor reiterated that the board did not explicitly discuss any possibility of raising interest rates. She added, “We discussed whether our message to the markets should be adjusted, but the stance remains clear: in the near term, we do not expect any rate cuts.”
The central bank has halted rate hikes since last November, judging that the current rate of 4.35%—up from a pandemic-low of 0.1%—is sufficient to contain inflation within the target range of 2% to 3%, while also preserving the employment gains.
With underlying inflation remaining at 3.9% in the last quarter and labor market strength persisting, there is no immediate need to adjust monetary policy, unlike the recent action by the U.S. Federal Reserve, which cut rates by 50 basis points to preempt significant job losses.
Commenting on the situation, AMP’s chief economist said, “Although the central bank did not explicitly consider raising rates because conditions have not changed significantly since the last meeting, its tone remains slightly hawkish.” He added, “We believe rates have peaked, and we expect the first cut in February next year. However, a rate cut could still happen before the year ends if unemployment rises sharply or underlying inflation decreases more significantly.”
In a related development, Australian market sentiment improved on Tuesday, boosted by additional stimulus measures from the Chinese central bank, which announced cuts to reserve requirements and interest rates, including on existing mortgages.
Investors are now awaiting August inflation data, due on Wednesday. Headline inflation is expected to have slowed to 2.7% annually, helped by government electricity rebates, but core inflation could again highlight ongoing challenges with high prices.
