Australia’s central bank held its cash rate at 3.60% on Tuesday, in line with expectations, noting that recent data indicated inflation could exceed forecasts in Q3 and that the economic outlook remained uncertain.
Concluding a two-day policy meeting, the Reserve Bank of Australia (RBA) said the board considered it prudent to maintain a cautious stance, while remaining ready to respond to global developments.
Markets had largely discounted the possibility of a rate cut this week following robust Q2 GDP growth and a high monthly inflation reading, both of which support a gradual approach to policy easing.
As it stands, swaps now indicate a 40% chance of a rate reduction at the next policy meeting in November, down from 50% prior to the announcement. The Australian Dollar climbed 0.4% to $0.66, while three-year bond futures dropped 4 ticks to 96.40.
“Recent data, while partial and volatile, suggest that inflation in the September quarter may be higher than expected at the time of the August Statement on Monetary Policy,” said an RBA board statement.
“The board judged that it was appropriate to remain cautious, updating its view of the outlook as the data evolve. The board remains alert to the heightened level of uncertainty about the outlook.”
The RBA has taken a gradual, cautious approach to easing policy, cutting rates in February, May, and August while evaluating quarterly inflation data. It has underscored that the pace of future rate reductions will depend on incoming data, Reuters reports.
Volatile monthly inflation readings indicate that the quarterly figure could exceed expectations. Meanwhile, the economy expanded at its fastest annual rate in nearly two years during Q2, driven by a rebound in consumer spending after a prolonged slowdown.
Employment growth has moderated, yet the unemployment rate remains at a historic low of 4.2%. The central bank assessed that the labour market is near full employment, though some sectors continue to experience tightness.
“Overall, today’s statement casts some doubt as to whether the Bank will cut rates by 25 basis points at its next meeting in November, as we currently expect,” according to Abhijit Surya, senior APAC economist at Capital Economics. “Nevertheless, we still think there's a strong case for the Bank to resume policy easing before long.”
The central bank had projected headline inflation, which came in at 2.1% last quarter, to rise to 3.1% by mid-next year as electricity rebates diminish. Core inflation, however, is expected to remain stable at around 2.6% over the coming years.
“Financial conditions have eased since the beginning of the year and this seems to be having some impact, but it will take some time to see the full effects of earlier cash rate reductions,” the board went on to add.