AUSTRALIA’S central bank chief said on Tuesday (May 7) interest rates were at the right level after holding steady for a sixth month, but cautioned that inflation risks were on the upside in a sign policy was unlikely to be eased anytime soon.
Wrapping up its two-day May policy meeting, the Reserve Bank of Australia (RBA) kept rates at a 12-year high of 4.35 per cent.
However, it stopped short of reinstating a tightening bias that some economists had tipped after first quarter inflation and the labour market failed to cool as much as expected.
In unusually forthcoming remarks, RBA governor Michele Bullock said she hoped the economy would not have to “stomach” higher interest rates, but the board was prepared to act if service sector inflation stayed stubbornly high.
The dovish comments jarred financial markets, which had been wagering on a real chance of another hike in rates following a disappointingly high inflation reading in the first quarter.
The Australian dollar fell 0.5 per cent to US$0.6587, while three-year bond futures rallied eight ticks to 96.06. Markets slashed bets of another hike this year to imply a probability of just 13 per cent for September, compared to 43 per cent early in the day.
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Bullock said the board did discuss raising interest rates at the meeting, but judged that monetary policy was already restrictive enough to bring inflation back to the bank’s target band of 2 to 3 per cent by late 2025.
“Right now we believe that rates are at the right level to achieve this, but there are risks and at this stage, the board is not ruling anything in or out,” she said.
The board also appeared to have looked past hawkish forecasts from the bank’s economists that showed inflation is expected to pick up to 3.8 per cent and stay there until the end of the year, from 3.6 per cent in the first quarter, even assuming no rate cuts until mid 2025.
Inflation slowed less than expected in the first quarter, underlining a home-grown inflation challenge, while recent labour market data confirmed only a gradual loosening, with the jobless rate at 3.8 per cent in March.
“The combination of the less hawkish than expected language in the post-meeting statement and the larger than expected upward revisions to the RBA’s inflation forecasts over the next few quarters implies the hurdle to another hike could be higher than markets have been expecting,” said Adam Boyton, head of Australian economics at ANZ.
“We continue to favour November for the start of the easing cycle, although the risks remain skewed towards that being delayed into 2025 and being shallower than we are forecasting.”
Globally, other central banks are also struggling in their last mile attempts to get inflation back to target, complicating the outlook for eventual rate cuts.
The Federal Reserve is now expected to cut less than twice in 2024, a change from about six reductions priced in at the beginning of the year.
The Australian government delivers its annual budget statement next week and is under intense pressure to curb spending in the fight against inflation. REUTERS
