The Reserve Bank has denied Australian borrowers a pre-Christmas bonus, leaving interest rates on hold for a ninth consecutive meeting.
Hopes for a near-term rate cut improved, however, with the RBA’s board saying it was “gaining some confidence that inflation is moving sustainably towards target”.
In recent previous statements the bank had declared it was not “ruling anything in or out”, a phrase that had implied another interest rate rise in this cycle was possible. Those words were not part of the new statement on Tuesday.
The RBA’s decision to leave the cash rate at its 13-year high of 4.35% level, announced on Tuesday, was widely expected by pundits and financial markets alike.
Still, the altered wording was taken by investors as a ditching of the bank’s “hawkish” stance to interest rates. The dollar shed more than a quarter of a US cent in the immediate aftermath of the decision to about US63.8c, and shares pared their loss for the day. Lower interest rates tend to hurt the dollar and aid corporate profits.
The RBA governor, Michele Bullock, however, said the board did not consider a rate cut – or hike – at this week’s meeting.
“I honestly don’t know if we’re going to be cutting in February,” Bullock told a media conference in Sydney. “We’re going to be looking at the data and be data-driven.”
Mortgage holders and businesses might have been hoping from relief after the central bank lifted interest rates 13 times between May 2022 and November 2023, pushing debt repayments to a record share of income.
Calls for the RBA to start cutting interest rates have intensified after Australia’s economic growth slumped to an annual pace of 0.8% in the September quarter, the weakest outside the Covid disruptions since the early 1990s recession.
While many overseas counterparts have started to cut borrowing costs, Bullock has said the board wants to be convinced inflation will subside “sustainably” to within its 2%-3% target range.
The consumer price index remained at 2.1% in October from the previous month, while underlying inflation – that the RBA watches closely – rose to an annual clip of 3.5% from September’s 3.2%. The more complete quarterly inflation data, released in October, had CPI at 2.8% – the lowest in 3.5 years – while core inflation was 3.5%.
Bullock, who will hold her regular media conference in Sydney from 3.30pm Aedt, has also said the RBA wants to retain as much of the recent employment gains as possible. The economy has added more than 1m jobs since the Albanese government took office within weeks of the first RBA rate hike in this cycle.
Before today’s rates decision, markets were betting there was only about a one-in-four chance of a cut when the RBA holds its next meeting – 17-18 February – with a 25 basis-point cut fully priced in for the second gathering of the year, ending 1 April.
The RBA will get December quarter inflation figures on 29 January and will want to see solid proof that price prices are continuing to ease.
“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,” the RBA said.
Gareth Aird, head of Australian economics at CBA – alone among the big four banks to predict a February RBA rate cut – said the central bank had made an “unambiguous shift in the dovish direction”.
By referring to the historical context for the nation’s weak GDP growth, the board was “placing more weight on the weak economic growth pulse as inflation falls”, Aird said, adding CBA was sticking to its February cut prediction.
The ANZ predicts just two RBA rate cuts next year starting from May – the most pessimistic among the big four banks.
Adam Boyton, its head of Australian economics, highlighted RBA comments that labour market conditions “remain tight” and while September quarter household incomes and consumption had recovered a bit slower than expected, “more recent information has suggested a pick-up in consumption in October and November”.
“We want to bring inflation down in a way that doesn’t cause a spike in unemployment,” Bullock said to journalists. “That’s the balancing act we are trying to get right and it is a challenge.”
