The Reserve Bank left its cash rate unchanged at 4.35% after its first meeting of the year on Tuesday. Nevertheless, it hinted at the possibility of rate hikes to control inflation, although it also suggested that further rate increases might not be necessary, depending on inflation and economic indicators.
The bank emphasized that its decisions regarding interest rates primarily revolve around inflation. Consequently, it anticipates a prolonged period of elevated interest rates, which helped the Australian dollar rebound above 65 US cents following a dip due to the strengthening of the US dollar on Monday.
The Australian Stock Exchange (ASX), influenced by a weak Wall Street, showed minimal reaction to the RBA’s announcement. Wages and productivity were briefly mentioned without extensive discussion.
According to the statement, “While there are encouraging signs, the economic outlook is uncertain, and the Board remains highly attentive to inflation risks. The central forecasts anticipate inflation returning to the target range of 2–3 per cent in 2025, and to the midpoint in 2026. Services price inflation is expected to gradually decline as demand moderates and growth in labor and non-labor costs eases. Employment is expected to continue growing moderately, with the unemployment rate and broader underutilization rate projected to increase slightly further.”
The statement reaffirmed the Board’s commitment to prioritizing the timely return of inflation to the target range, aligning with the RBA’s mandate for price stability and full employment. The Board emphasized that it needs to be confident about the sustainability of inflation moving towards the target range.
“While recent data indicate a decline in inflation, it remains elevated. The Board anticipates it will take some time before inflation firmly enters the target range. The path of interest rates required to achieve this will depend on data and evolving risk assessments, leaving room for potential further rate increases.”
The Board pledged to closely monitor global economic developments, domestic demand trends, and inflation and labor market outlooks. They remain unwavering in their determination to bring inflation back to the target range and are prepared to take necessary actions to achieve this goal.