RBA Held Rates Unchanged Again, but Kept More Hikes on the Table

Another Hold

The Reserve Bank of Australia has delivered 400 basis worth of hikes, since the May 2022 lift-off, but has shifted to a conservative approach this year and kept rates unchanged at 4.1% today ^[1]. This was the third consecutive hold and the fourth overall in this cycle. The pause allows policy makers to assess the impact of their cumulative tightening and the economic outlook.

Inflation in Australia "has passed its peak", moderating to 6% y/y in the second quarter, while the latest monthly data showed that CPI decelerated further to 4.9% y/y in July and the lowest in over a year. At the same time, the economy undergoes a period of "below-trend growth", which the bank expects to continue for "a while". Moreover, the labor market has shown signs of cooling, as unemployment rose to 3.7% in July and 14.6K jobs were lost, in the biggest decline of the year.

These developments allowed policymakers to stay on the sidelines again, but it is early to declare victory. Although inflation is coming down, it is "still too high" and not projected to fall within the 2-3% target before late-2025 ^[2]. Furthermore, employment conditions may have eased, but they remain tight with elevated wage growth.

These data maintain pressure for further constraint and officials kept the door open to more hikes, repeating today that "some further tightening of monetary policy may be required" for a timely return of inflation to target. Today's meeting was the last under Governor Lowe, who will be succeeded by current deputy Bullock later this month. In a speech last week, the next leader of the RBA said that her "first priority" is to keep focus on inflation and warned that officials "may have to raise interest rates again" ^[3].

AUD/USD has entered its straight negative month and extends its losses today, after the RBA stayed again on the sidelines, threatening August's 2023 lows.