Australia’s central bank held key interest rates at a 12-year high on Tuesday as it struggled to overcome defiant price pressures that have held it back from joining the global easing cycle.
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Published on 24 Sep 2024 • 3 minutes of reading
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(Bloomberg) — Australia’s central bank held key interest rates at a 12-year high on Tuesday as it struggled to overcome stubborn price pressures that have held it back from joining the global easing cycle.
The Reserve Bank – as expected – kept the cash rate at 4.35% for the seventh straight meeting and restated it did not “order anything in or out” in policy. The RBA has been working to achieve a significant post-Covid job output and as a result inflation has gradually eased.
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“The board remains steadfast in its determination to return inflation to the target and will do what is necessary to achieve that result,” the rate-setting board said in a statement. “Policy should be restrictive enough that the board is confident that inflation is moving toward the target range.”
Investors lowered short-term expectations of a rate cut by the RBA, with the policy-sensitive three-year note erasing losses earlier to be little changed at 3.55%. The currency rose to near its highest level since July 2023. Swap traders are pricing in a possible rate cut at the December meeting.
“The RBA used the word ‘sustainable’ four times in its statement to indicate that the drop in inflation will not be enough to convince it to cut rates,” said Stephen Spratt, rate strategist at Societe Generale in Hong Kong. . “This seems to be a signal for the market not to read too much into tomorrow’s August CPI data, which is expected to return to the target range.”
Monthly inflation data on Wednesday is expected to show prices below 3% for the first time since August 2021, reflecting government energy subsidies and other measures.
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The RBA’s decision highlights its more exceptional status compared to its peers. Last week, Federal Reserve Chairman Jerome Powell led his colleagues to reduce the outsize rate designed to maintain the strength of the US economy.
Economists generally expect the RBA’s rate-cutting cycle to begin in February while financial markets see a two-in-three chance of the first easing in December.
Governor Bullock has repeatedly rejected talk of short-term easing, citing forecasts that inflation will only return to the 2-3% target by the end of 2025. This has put him in the political firing line of members of the governing Labor Party and the minority party. which pushes the rate.
Bullock said the board wants to be sure that rate growth is steady back to the bank’s target.
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At 3.9%, core prices remained above target, driven mainly by non-discretionary spending such as insurance, education and housing. Australia’s labor market remains healthy with unemployment at 4.2%.
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The RBA’s hawkish policy stance combined with political jockeying over pending reform of its board structure has fueled local criticism of the bank.
The left-wing Greens party demanded the government use its reserve power to get the RBA to cut rates as a condition for backing legislation that would split the board into two – one for monetary policy and the other for governance. The government dismissed the Greens’ suggestion as “insane.”
In a statement on Tuesday, the RBA board highlighted instability overseas, saying “geopolitical uncertainty remains pronounced.” This represents a growing war between Israel and Hezbollah as the conflict in the Middle East shows signs of expanding.
One factor contributing to persistent price pressures in Australia is the inadequacy of monetary fiscal policy, economists say. While big government has helped keep Australia out of recession and boosted the labor market, it has also made the RBA harder.
The government rejected suggestions that the policy helped drive up fuel prices.
Westpac Banking Corp this week released research showing new public demand rose to a record 27.3% of the real economy in the June quarter from a pre-pandemic average of around 22.5%. Economist Pat Bustamante thinks the stock will reach 28% by the end of next year.
“The increase in new public spending as part of the real economy has never been at such a speed and scale,” he said.
—With assistance from Toby Alder, Matthew Burgess and Georgina McKay.
(Adds commentary from analysts, market updates)
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