The Reserve Bank (RBA) has not taken inspiration from the US Fed, announcing another hold on Tuesday amid an ongoing hawkish tone from the governor.
The RBA left the cash rate unchanged at 4.35 per cent for the seventh consecutive time, noting: “At its meeting today, the board decided to leave the cash rate target unchanged at 4.35 per cent and the interest rate paid on Exchange Settlement balances unchanged at 4.25 per cent.”
The RBA outlined that its top priority is to sustainably return inflation to target while maintaining price stability and full employment, with current projections indicating that it will take time before inflation falls within the target range.
“The board will continue to rely upon the data and the evolving assessment of risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market,” it said.
“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”
Elaborating on inflation, the RBA said that while higher interest rates have worked to bring aggregate demand and supply closer towards balance, and in turn have lowered inflation, “Our current forecasts do not see inflation returning sustainably to target until 2026”.
“In year-ended terms, underlying inflation has been above the midpoint of the target for 11 consecutive quarters and has fallen very little over the past year,” the bank warned.
The consensus among economists was for the rate to remain on hold in September.
Economists, politicians divided on next steps
While economists remain split on the ideal strategy for the future, Treasurer Jim Chalmers provided an interesting take on the RBA’s latest decision on Tuesday, suggesting that the lack of rate hikes indicates a positive shift in the fight against inflation.
“The governor and the Reserve Bank board have noted today the very substantial progress that Australia has made when it comes to getting on top of this inflation challenge,” Chalmers said.
In stark contrast, shadow treasurer Angus Taylor painted a far grimmer picture, arguing that Australia is lagging behind in the fight against inflation and falling to the back of the pack.
“Australia is at the back of the pack in bringing down interest rates. Our core inflation hasn’t come down since January this year,” Taylor said, accusing Labor of “completely” failing to “fight and beat its homegrown inflation”.
“We expect the RBA will commence an easing cycle before it declares we have hit full employment given policy is currently restrictive – waiting until the destination is reached before normalising the cash rate means unemployment will rise by more than is both necessary and desired,” Aird said.
“We continue to look for 125 bp of RBA easing by end-2025 that would take the cash rate to 3.10 per cent.”
Krishna Bhimavarapu, APAC economist at State Street Global Advisors, challenged the RBA’s latest decision, labelling the central bank as “the hawkish outlier” in the current economic landscape.
“It is important to remember that early birds get most of the worms and countries recalibrating their rates will likely revive their economies faster,” Bhimavarapu said.
Others were more forgiving, concluding that the RBA is responding appropriately to inflation, which, most said, continues to hover uncomfortably high above its target.
“Put simply, the RBA will continue to sit on its hands and with only two more meetings in 2024, it is conceivable that rates remain on hold for the rest of the year with a potential ease coming early in 2025 should trends prove supportive,” said Dwyfor Evans, head of APAC Macro Strategy at State Street Global Markets.
VanEck’s head of investments and capital markets, Russel Chesler, maintained that it is “highly unlikely” that there will be any rate cuts until well into 2025.
“The markets are pricing in cuts to start by February 2025, but we do not believe this is likely. Many data points still indicate strength in the economy and persistent inflationary pressure,” Chesler said.
Like him, HSBC’s Paul Bloxham said: “Our central case is that the RBA does not cut until Q2 2025”.
“However, we see some risk it could take even longer than that. It is also plausible scenario that the RBA misses the easing phase altogether.”
