Australia’s central bank holds rates steady, signals no rush to hike

[SYDNEY] Australia’s central bank on Tuesday (Dec 9) left its cash rate steady as expected at 3.6 per cent, saying risks to inflation had tilted to the upside but signalled the bank was in no hurry to tighten monetary policy.

Wrapping up the last policy meeting of the year, the Reserve Bank of Australia (RBA) also said domestic demand had been stronger than expected and could add to capacity pressures.

Markets had seen no chance of an easing this week after a run of hot data on inflation, economic growth and household spending.

The Australian dollar was little changed immediately following the statement but started moving higher after RBA governor Michele Bullock ruled out any further rate cuts at a post-policy press conference. Bullock said if inflation appears to be persistent, it will raise some questions on policy.

The Aussie was slightly higher at US$0.6639, while three-year government bond yields were up a touch.

“The recent data suggest the risks to inflation have tilted to the upside, but it will take a little longer to assess the persistence of inflationary pressures,” the board said in a statement.

“There are uncertainties about the outlook for domestic economic activity and inflation and the extent to which monetary policy remains restrictive.”

RBA in extended pause?

The RBA has cut interest rates three times this year but inflation is rearing its head again, having climbed for four straight months to 3.8 per cent in October. The trimmed mean measure of core inflation ran at 3.3 per cent, above the mid-point of the target band of 2 to 3 per cent.

The board said there is uncertainty about how much of a signal the new monthly CPI numbers provide.

“Nevertheless, the data do suggest some signs of a more broadly based pick-up in inflation, part of which may be persistent and will bear close monitoring,” the statement added.

Harry Murphy Cruise, head of economic research at Oxford Economics in Australia, ruled out any further rate cuts for next year, but added that “the board’s tone was calmer than expected”. “Explaining away part of the inflation surge suggests the board is in no rush to hike,” he said.

Other analysts said the markets had been too eager to price in near-term policy tightening.

“This isn’t the statement of a central bank with one hand hovering on the rate hike button,” said Tony Sycamore, market analyst at IG in Sydney.

The economy, which could be running near its speed limit, grew at the fastest pace in two years last quarter, fuelled by spending by businesses, governments and consumers. The labour market also stayed resilient, with the jobless rate edging lower to 4.3 per cent in October, from 4.5 per cent.

The mood among consumers, long stuck in the doldrums, has turned positive in a boost to the outlook for household spending. Home prices surged to new record highs, home loan growth jumped and upbeat stock markets suggest that financial conditions might not be as restrictive as previously thought.

“Our views on the outlook for interest rates are unchanged given the nature of today’s post-meeting statement,” ANZ analysts said.

“We expect the cash rate to remain at 3.60 per cent for an extended period.” REUTERS