Australia's central bank kept interest rates at their highest level in 12 years in a move that was widely expected, maintaining a neutral stance that surprised markets and sent the currency lower.
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(Bloomberg) — Australia's central bank kept interest rates at their highest levels in 12 years in a widely expected move, maintaining a neutral stance that surprised markets and sent the currency lower.
The Reserve Bank kept interest rates at 4.35% for the fourth straight meeting on Tuesday, while raising its estimates for near-term inflation and slightly lowering estimates for economic growth and unemployment. The updated forecast used a technical assumption of no change in prices until mid-2025.
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Read more: Reserve Bank of Australia raises near-term inflation expectations, cuts unemployment
“The Governing Council expects that it will be some time before inflation sustainably reaches the target range and will remain vigilant to upside risks,” the RBA said in a statement. “The council does not judge anything either inside or outside.”
The Australian dollar fell as much as 0.4% to 65.98 US cents after the decision. The yield on three-year policy-sensitive bonds fell 8 basis points to 3.95% as swap traders trimmed their bets on a rate hike this year. Stocks advanced.
“Markets are likely to expect the RBA to back away from its longstanding guidance that another rate hike cannot be ruled out” in light of the first-quarter inflation surprise, said Alex Low, a strategist at Toronto-Dominion Bank in Singapore. “Today's unchanged guidance likely disappointed hawks with the Aussie dollar taking a hit and Australian interest rates rising.”
The meeting followed data that showed headline and core inflation beat expectations in the first three months of the year and remained well above the Reserve Bank of Australia's target range of 2-3%.
It also follows a long-awaited decision by the Federal Reserve last week, when Chairman Jerome Powell kept hopes alive for a rate cut this year while acknowledging that the explosion in inflation had dented confidence in easing price pressures.
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It looks like the Reserve Bank of Australia may face a similar path. Bullock has previously said the bank is in a data-driven mode and will only start cutting interest rates once it is confident that inflation is on track to return “sustainably” to target.
Su Lin Ong, chief economist for Australia at Royal Bank of Canada in Sydney, said the RBA's post-meeting statement was “almost neutral.”
The central bank “has gone from something close to a neutral bias, to something resembling a hawkish bias,” said Stephen Miller, investment strategist at GSFM in Sydney.
“I would be surprised if the option of raising interest rates is not on the table at this week’s meeting,” he said.
While the RBA does not publish bullet charts or its own forecast path for the cash rate, Governor Michelle Bullock has previously suggested it would not need to wait until inflation is within a range before cutting. However, it has repeatedly pushed back against speculation about easing, reflecting the Reserve Bank of Australia's forecast that inflation will only return to target in the second half of 2025.
Read more: Reserve Bank of Australia cuts 2024 GDP forecast to 1.6%; Inflation at 3.8%
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An unknown factor for the central bank is the impact of the government's budget that will be delivered within a week, as well as tax cuts that begin around mid-year.
“There is no change in the overall tone of the RBI,” said Devika Shivadekar, an economist at consultancy RSM Australia. “Inflation expectations have likely been revised upwards taking into account the risks of impending tax cuts and the Federal Budget. We remain confident in our call that the RBA will not pivot until it sees two more quarterly inflation readings.
Data recently indicated that the Australian economy is slowing broadly with GDP contracting on a per capita basis, while tepid retail sales reflect pessimistic consumer sentiment.
Meanwhile, the labor market remains tight, with unemployment at 3.8%. Data released Monday showed a measure of job postings rose 2.8% in April, rising 36.5% from its pre-pandemic level.
Employment flexibility has given policymakers optimism that they can engineer a soft landing, lowering inflation while retaining the massive job gains of recent years.
-With assistance from Tomoko Sato and Matthew Burgess.
(Adds comments from economists).
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