A Sydney ferry passes the Opera House and skyline of the central business district area on May 12, 2020 in Sydney, Australia.
James D. Morgan | Getty Images
The Reserve Bank of Australia held interest rates at 4.1% for a second month on Tuesday as the central bank buys time to assess the impact of previous hikes, while warning of further hikes in the future.
This decision to hold rates steady comes as inflation in Australia slowed to 6% in the second quarter from 7% in the first quarter, but was still well above the RBA’s stated target of 2% to 3%.
Economists were divided on whether the Australian central bank would raise interest rates at this meeting, with a slim majority expecting a 25-basis point hike.
“The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so,” Governor Philip Lowe said in a statement.
“In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook,” he added.
The Australian dollar extended earlier losses against the dollar after the announcement. It was trading down almost 0.7% at at about 0.67 to the dollar in afternoon trading in Asia.
The Australian central bank has hiked interest rates by a cumulative 400 basis points since May last year to its highest in 11 years. The country has been grappling with surging inflation as economic activity picked up after the height of the Covid-19 pandemic.
“While the RBA retains a tightening bias, we expect the hurdle to another rate is high,” Commonwealth Bank of Australia economists said in a note. “It would take an upside surprise to the economic data from here, namely on prices and/or wages, for the RBA to shift its assessment of the outlook.”
Forward guidance
In his August policy statement, the RBA governor pointed to several “significant uncertainties.”
Among them is the lag time that policy takes root in the real economy, and how firms’ pricing decisions and wages will respond to the slowing economy at a time when the labor market remains tight.
Lowe pointed to consumption growth that has substantially slowed due to cost of living pressures and higher interest rates.
“The central forecast is for CPI inflation to continue to decline, to be around 3.25% by the end of 2024 and to be back within the 2-3 per cent target range in late 2025,” Lowe said.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks,” he added.
Tuesday’s RBA policy meeting is Philip Lowe’s penultimate meeting as governor. Michele Bullock is set to succeed him when he finishes a seven-year term in office on Sept. 17.
