The Reserve Bank of Australia (RBA) ruled out additional rate cuts on Tuesday, after keeping interest rates at 3.6%, cautioning that future hikes could be necessary if inflation remains persistent.
Summing up the final policy meeting of the year, Governor Michele Bullock noted that while the board did not specifically consider a rate increase, it did review the conditions under which a rate rise could become necessary.
“What I would say at this point is what we know at the moment, I don't think there are interest rate cuts in the horizon for the foreseeable future,” Bullock stated.
“The question is - is it just an extended hold from here, or is it a possibility of a rate rise? I couldn't put a probability on those.”
While markets initially interpreted the RBA’s statement as relatively balanced, resulting in only modest moves, Bullock’s hawkish remarks gave the Australian Dollar a boost, lifting it 0.3% to $0.6645.
Three-year government bond yields jumped 11 basis points to 4.152%, their highest level since November last year, Reuters reports.
Investors have brought forward expectations for rate hikes next year, assigning a 28% probability to a February increase, while March is approaching a 50% likelihood. Overall, the market is pricing in 47 basis points of tightening next year, roughly equivalent to two rate hikes.
“The recent data suggest the risks to inflation have tilted to the upside, but it will take a little longer to assess the persistence of inflationary pressures,” the board said in a statement.
“There are uncertainties about the outlook for domestic economic activity and inflation and the extent to which monetary policy remains restrictive.”
The RBA has reduced interest rates three times this year, yet inflation is resurfacing, rising for four consecutive months to 3.8% in October. The trimmed mean measure of core inflation stood at 3.3%, exceeding the midpoint of the 2%-3% target range.
The board noted that there is uncertainty over how much guidance the new monthly CPI data actually provides.
“Nevertheless, the data do suggest some signs of a more broadly based pick-up in inflation, part of which may be persistent and will bear close monitoring,” the board statement added.
The economy, potentially operating close to its full capacity, expanded at its fastest pace in two years last quarter, driven by spending from businesses, governments, and consumers. The labour market remained strong, with the unemployment rate falling slightly to 4.3% in October from 4.5%.
Furthermore, consumer sentiment, which had long been subdued, has turned positive, providing a boost to the outlook for household spending.
Home prices have hit new record highs, home loan growth has accelerated, and strong stock markets indicate that financial conditions may not be as tight as previously assumed.