By Stella Qiu and Wayne Cole
SYDNEY (Reuters) – Australia’s central bank held interest rates steady on Tuesday, as expected, and reiterated that policy would need to stay restrictive until it was certain core inflation was slowing as desired.
There was subdued market reaction, with the Australian dollar little changed at $0.6590. Rate swaps suggest there is a scant chance of a rate cut this year, with a first easing not fully priced in until May next year.
Wrapping up its November policy meeting, the Reserve Bank of Australia (RBA) kept rates at a 12-year high of 4.35%. It repeated that it was not ruling anything in or out on policy.
Markets have heavily wagered on a steady outcome as the labour market stayed surprisingly strong and third quarter core inflation was still a little sticky.
“While headline inflation has declined substantially and will remain lower for a time, underlying inflation is more indicative of inflation momentum, and it remains too high,” said the board in a statement.
“This reinforces the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out.”
The central bank’s latest forecasts showed underlying inflation – a trimmed mean measure closely watched by the RBA – is expected to slow just a touch to 3.4% by year-end from 3.5% in the third quarter. It won’t return to target until 2026.
The RBA has held its policy steady for a year, judging the current cash rate of 4.35% – up from 0.1% during the pandemic – is restrictive enough to bring inflation to its target band of 2-3% while preserving employment gains.
Headline inflation slowed to 2.8% in the third quarter, back in the target band for the first time since 2021, but that was mostly due to government rebates on electricity bills. Underlying inflation came in at 3.5%, still somewhat sticky.
The economy barely grew in the last few quarters but the labour market somehow has stayed surprisingly strong with employment gains averaging 3.1% over the past year, twice the U.S. rate. The jobless rate stayed low at 4.1%.
All that means is that a rate cut this year is looking unlikely, making the RBA one of the last few central banks to ease policy.
In a separate statement on monetary policy, the RBA made a point of saying that financial conditions in Australia were still not as tight as in most other developed countries even after recent rate cuts there.
“The RBA is playing a patient game of waiting for output to come back to the economy’s potential. This means the recent run of very weak growth is likely to continue,” said Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia.