RBA holds key rate to assess economy, sending currency lower

AUSTRALIA’S central bank kept interest rates unchanged at its final meeting of the year, as cooling inflation and a softening labour market suggest its policy tightening to date has gained traction.

The Reserve Bank of Australia (RBA) maintained its cash rate at a 12-year high of 4.35 per cent, as anticipated by economists, at Tuesday’s (Dec 5) meeting.

In explaining the decision, the central bank cited a broader downtrend in inflation and lags in the transmission of tightening between May 2022 and November 2023.

“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks,” said RBA governor Michele Bullock in a post-meeting statement.

After the news, the Australian dollar fell 0.5 per cent, and the policy-sensitive three-year government bond yield erased earlier gains to trade at 4.04 per cent.

Swaps traders trimmed their bets that RBA will hike rates again. They now see less than a 30 per cent chance for an increase in the first half of 2024, down from better than 40 per cent odds before the statement.

The RBA has proved to be a careful hiker in the current campaign, even as elevated services prices mean core inflation remains sticky. Australia’s 4.25 percentage points of hikes is one point below that delivered by the US and New Zealand.

Underlining that, markets are pricing in cuts from the US Federal Reserve next year, whereas there remain bets on tightening by the RBA.

The RBA is trying to bring the economy in for a soft landing. Bullock and her colleagues have so far been successful, with data on Wednesday expected to show that the A$2.3 trillion (S$2 trillion) economy maintained its momentum.

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At the same time, monthly inflation slowed more than expected in October – the first reading for the fourth quarter – in a welcome sign for policymakers.

Another reason for RBA’s caution is Australia’s highly geared borrowers, who are overwhelmingly on variable rates, unlike the US, where most mortgages are fixed for 30 years.

“Higher interest rates are working to establish a more sustainable balance between aggregate supply and demand in the economy,” Bullock said on Tuesday. “Holding the cash rate steady at this meeting will allow time to assess the impact of the increases in interest rates on demand, inflation and the labour market.”

Data on the economy has been mixed lately. The housing market is at record highs, home loans jumped in October and business confidence is still resilient.

Also helping the economy is surging population growth that is boosting demand for everything from housing to transport and dining out.

On the flip side, consumer sentiment is in the doldrums while the labour market is beginning to show signs of loosening, with economists predicting the jobless rate will soon rise from the current ultra-low 3.7 per cent. Figures this week showed job ads dropped for a third straight month in November, and were down almost 17 per cent from a year earlier.

Most economists reckon the RBA is done with tightening in this cycle, though a few see the risk of another hike early in 2024.

Australia’s central bank does not meet in January. In the following month, it will introduce a new system under which the rate statement will be signed by a monetary policy committee and Bullock will hold a post-meeting press conference.

RBA meetings will also be reduced to eight from 11 per year.