Australia’s central bank kept its benchmark cash rate unchanged at 4.35% on Tuesday, noting that economic growth is slowing due to tighter financial conditions.
However, it cautioned that further rate increases remain possible if necessary to curb inflation.
At the conclusion of its June policy meeting, the first pause in its rate-hiking cycle this year, the Reserve Bank of Australia (RBA) acknowledged that inflation remains elevated and reaffirmed its commitment to bringing it under control, including raising interest rates again if required.
Markets had largely expected the central bank to leave interest rates unchanged, supported by a series of weaker-than-anticipated domestic indicators, including inflation, consumer spending, and employment data.
In addition, a peace agreement in the Middle East that led to the reopening of the Strait of Hormuz helped lower oil prices, easing concerns about inflationary pressures, Reuters reports.
“Resolution of the conflict in the Middle East is at an early stage, and there are plausible scenarios where inflation is higher and activity lower than envisaged under the May baseline forecasts,” the board said in a statement.
“Global oil supply issues will take some time to resolve, maintaining upward pressure on global energy prices and inflation.”
The central bank’s unanimous decision was widely anticipated by investors. Following the announcement, the Australian Dollar remained under pressure, trading 0.3% lower at $0.7050, while yields on three-year government bonds rose slightly by 2 basis points to 4.457%.
Financial markets are currently pricing in around a 30% probability of an interest rate increase in August. Overall, swap markets suggest only 16 basis points of additional tightening over the remainder of the year, less than the equivalent of a single quarter-point rate hike.
The RBA has increased interest rates by a total of 75 basis points since February as it continues efforts to rein in persistent inflation, driven in part by sharply higher energy prices. While headline inflation eased to 4.2% in April, a key measure of underlying inflation rose to 3.4%, remaining above the RBA’s target range of 2% to 3%.
As interest rates returned to their highest levels since the pandemic, economic growth nearly stalled in the first quarter, expanding by only 0.3% on a quarterly basis as consumers reduced spending. Meanwhile, the unemployment rate rose to 4.5%, its highest level in four and a half years.
Furthermore, the long-running surge in housing prices has come to an end, with the government's planned tax reforms causing a significant decline in demand for new loans from property investors.
The central bank took a more cautious approach than many other central banks during the post-pandemic inflation spike, placing greater emphasis on preserving the labour market gains rather than tightening aggressively.
Interest rates reached a peak of 4.35% in early last year, and were later reduced to 3.6% through three rate cuts, but inflation subsequently picked up again, undermining that strategy.