Monday, December 23, 2024

RBA Signals Key Rate to Stay at 12-Year High for Time Being

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(Bloomberg) — Australia’s central bank signaled it will keep its key interest rate at a 12-year high in the near term as it struggles with stubborn inflation that’s holding it back from joining a global easing cycle.

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“Based on what we know at the moment rates will remain on hold for the time being,” Governor Michele Bullock told a press conference in Sydney on Tuesday after keeping the cash rate at 4.35% for a seventh straight meeting. Still, the RBA isn’t “ruling anything in or out” on policy, she said.

Unlike in August when policymakers put a rate rise on the table, this time around a hike wasn’t “explicitly considered,” Bullock told reporters, sending the currency and bond yields lower. The Reserve Bank is focused on returning inflation sustainably to its 2%-3% target, she said.

The RBA, which is splitting with a global easing cycle as it waits for inflation to abate, is facing increasing pressures at home to lower borrowing costs, with politicians sparring over the outlook on interest rates ahead of an election due by May 2025. Bullock said the RBA won’t be dragged into politics.

The currency fell 0.3% to 68.17 US cents in early London trading, erasing a prior gain while the yield on three-year government bonds fell the most in almost two months. Swaps traders are pricing a 74% chance of a rate cut in December, up from 50-50 just before Bullock’s press conference.

“We believe that the RBA will water down its forward guidance from here to restore full optionality around the path of the cash rate,” said Gareth Aird at Commonwealth Bank of Australia. “Indeed there is little upside in the RBA prosecuting the potential outlook for interest rates.”

The RBA’s communication on Tuesday highlights its outlier status compared with peers. Last week, Federal Reserve Chair Jerome Powell led his colleagues to an outsize rate cut designed to preserve the strength of the US economy. Bullock acknowledged the divergence, pointing out that other banks had moved into more restrictive territory than the RBA.

Economists generally expect rate cuts in Australia to begin in February.

Bullock has repeatedly pushed back against talk of near-term easing, reflecting forecasts that inflation will only return to target in late 2025. That’s brought her into the political firing line from members of the ruling Labor party and minority parties that are pushing for a rate cut.

At 3.9%, Australia’s core prices remain well above target, driven largely by non-discretionary spending such as insurance, education and housing. The job market remains in good shape with unemployment at a still-low 4.2%.

Monthly data on Wednesday is expected to show inflation fell back within the RBA’s band for the first time since August 2021, reflecting government energy subsidies and other measures.

Bullock cautioned that the board wants to be confident price growth is moving sustainably back to the bank’s goal, not just moving in and out.

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The RBA’s resistance to easing combined with political jockeying over a pending reform of its board structure has spurred local criticism of the bank.

The left-wing Greens party is demanding the government use its reserve powers to order the RBA to cut rates as a condition to support legislation that would split the board in two — one for monetary policy and the other for governance. The government dismissed the Greens’ suggestion as “crazy.”

–With assistance from Matthew Burgess.

(Updates with governor’s comments from press briefing, market reaction)

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