(Nov 5): Australia’s central bank held its key interest rate at a 13-year high on Tuesday, aiming to keep up the pressure on stubbornly sticky inflation while joining much of the world in waiting for the outcome of US elections.
As expected, the Reserve Bank left its cash rate at 4.35%, marking a year at that level, and restated that it isn’t “ruling anything in or out” on policy. The RBA’s board highlighted the “high level of uncertainty” about the international outlook.
Underlying inflation “remains too high”, the rate-setting board said in a statement. “It will be some time yet before inflation is sustainably in the target range and approaching the midpoint. This reinforces the need to remain vigilant to upside risks to inflation and the board is not ruling anything in or out.”
The Australian dollar and three-year sovereign bond yields held gains as traders see policymakers standing pat for the time being.
Governor Michele Bullock has repeatedly said the RBA’s board isn’t ready to cut rates yet. She reiterated to reporters Tuesday that the board is looking for evidence that inflation is “going to be back sustainably in the band”.
“We’ve made good progress but as we’ve seen throughout the year, this last part of the job of getting inflation down is not easy,” she said.
While Australia’s core CPI has eased from its 2022 peak, at 3.5% it remains elevated and services inflation is still running strong. The RBA’s latest forecasts showed core inflation will hit its 2-3% target band in mid-to-late 2025, slightly earlier than it estimated in August.
“We are prepared to move if the data suggest that,” the governor said. “For example, if consumption comes in much weaker than we’re expecting and the private demand side of the economy is coming in much slower than expected that might be something that’s worth looking at.”
Traders have pushed back their pricing for an easing to May 2025, from February previously.
“The RBA remains on the hawkish side in the global central bank spectrum as it continues to stay away from the clear signalling of rate cuts,” said Charu Chanana, chief investment strategist at Saxo Asia Pacific. “That clearly fails to make an impact on markets, especially coming on a day when markets are awaiting the US election results in a closely-tied race, as well as announcements of further stimulus measures from China.”
Bullock acknowledged those issues played a part in the rate decision.
“We did think about geopolitical risks and things that might happen depending on various outcomes,” she told reporters. “The US election is one thing.”
The RBA said its policy is still “less restrictive” than peers even after rate cuts overseas, highlighting its outlier status. The Federal Reserve — which also meets this week — the Reserve Bank of New Zealand and other major central banks have already embarked on rate reductions to either preserve the strength of their economies or revive growth.
Meanwhile, Donald Trump has been campaigning for a return to the White House on a protectionist platform that includes threats to place hefty trade tariffs on China. That could have spillover effects for Australia, given China is its largest trade partner.
Bullock said it’s “premature” to do any scenario analysis of the impact of the US election on Australia.
Economic growth in Australia has decelerated sharply over the past year in response to tight monetary policy. Yet the labour market remains a bright spot with unemployment at a historically low 4.1%. That has given Bullock and her colleagues confidence in their ability to engineer a soft landing.
While the strong jobs market is supporting demand, economists say a dissonance in monetary-fiscal policy is making the RBA’s job harder.
Public expenditure in Australia is “running hot”, said Su-Lin Ong, chief economist at the Royal Bank of Canada. “Government consumption demand is in our view consistent with only a modest easing cycle from the RBA in 2025.”
Fitch Ratings estimate the government’s budget will swing to deficit in fiscal 2025, reflecting tax cuts and cost of living support for households as well as a fall in the prices of Australia’s key exports. The ratings agency described the country’s fiscal policy as “modestly expansionary”.
In its quarterly policy statement, the RBA upgraded forecasts for public demand from June 2025 through to December 2026.
The government has rejected suggestions its policies are helping fuel price growth.
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Source: TheEdge - 6 Nov 2024
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