RBA maintains interest rates, meeting expectations

The Reserve Bank of Australia (RBA) has kept interest rates steady at 4.35%.

The decision was based on key inflation figures released from the ABS last week, which demonstrated the Consumer Price Index (CPI) increased 1% in the June quarter and 3.8% year on year.

Interest rates will remain unchanged for an additional six weeks, until the RBA Board’s next gathering in late September.

The decision comes amid a dramatic increase in fluctuation across the economy and stock markets in recent days, with a massive stock sell-off removing trillions of dollars from the value of major tech companies around the world.

The Australian dollar initially gained ground but has since reversed direction and edged lower. In the European session, the AUD/USD is trading at 0.6778, down 0.24% as of the beginning of August.

RBA adjusts inflation forecasts amid market uncertainty

According to an RBA Board statement, the financial markets have been uncertain lately and the AUD has weakened.  Also, geopolitical uncertainty remains high, which may potentially impact supply chains.

The board will make decisions based on data and an evolving risk assessment. In doing so, it will keep paying close attention to improvements in the world’s economic and the financial sector, trends in consumer spending, and future projections for price increases and the labour market.

The RBA has also released its most recent quarterly Statement on Monetary Policy (SOMP), which includes changes to its formal projections for unemployment, inflation, and activity levels. It now believes it will take a bit more time than originally anticipated for underlying inflation to return to 2.5 percent, compared to its May forecasts, and the labor market outlook is slightly weaker than expected.

According to the SOMP, the underlying inflation is expected to get back to the desired range of 2-3 per cent in late 2025 and reach the midpoint in 2026.  This is a more gradual return to target than expected in May, owing to increased inflationary pressures in the economy. In part, this is due to a more optimistic outlook for domestic demand, driven by greater consumer demand and an upturn in consumer spending as real disposable earnings and household wealth rise. However, it also reflects the belief that the economy’s capacity to meet this demand is lower than previously thought.

RBA’s plans for interest rates

The quarterly rate of inflation remained unchanged, but the yearly rate was slightly higher than the previous quarter’s result of 3.6%.

However, the reduced average, which excludes volatile price changes and is the RBA’s preferred measure of underlying inflation, fell compared to the previous quarter, providing the board with trust that inflation was easing in line with expectations.

While some optimistic economists predict rate cuts as early as November, RBA governor Michele Bullock dismissed suggestions that the board could cut rates soon.

While one should be cautious about rising interest rates if inflation does not slow, economic data from the United States published early in August showed an important decline of the labour market, increasing speculation about an economic slowdown in the US. This might decrease the possibility of further inflationary pressures and potentially lead to rates being cut sooner.

Big banks anticipate rate cuts within months

While borrowers will have to put up with high rates of interest for a bit longer, two of the largest financial institutions anticipate the first interest rate to be announced in three months, at the RBA’s November board meeting.

Both Commonwealth Bank and Westpac expect a 25-basis point rate cut in November, while ANZ anticipates a rate cut in February.

Because monetary policy operates with a lag, Westpac chief economist Luci Ellis believes rate cuts will be required before inflation reaches its target.

Interest rate hikes fail to halt record home price growth

Although interest rates have remained at their highest level in 12 and a half years, Australia’s median home value reached a new high in July, according to the PropTrack Home Price Index.

However, national prices rose by only 0.08%, the smallest monthly increase seen since prices stopped falling in late 2022.

Australian central bank expected to delay rate cuts

Economists now expect the Australian central bank to remain far behind its international peers in lowering interest rates, with inflation at its core expected to fall slowly over the next year.

Headline inflation will fall as a result of newly implemented government rebates aimed at reducing the cost of rising electricity prices, which the central bank has stated it will largely ignore.

Meanwhile, the unemployment rate is expected to slowly rise, reaching 4.3% by the end of the year, up from 4.1% now.

The RBA chose to emphasise its ongoing inflation concerns in its statement rather than aligning the policy narrative with that of other central banks that are both already cutting or strongly suggesting that they are about to do so.

In response to the release of second-quarter inflation data last week, the RBA board stated that “inflation is proving persistent.”

While the RBA is concerned about inflation, it also recognises that the economy is slowing down.

Global factors are also at play, with the central bank identifying China as a major source of uncertainty and recent market volatility.

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