Australia: Central Bank Keeps Interest Rate at 12-Year High

The Australian central bank has maintained the policy rate at 4.35% for the sixth consecutive meeting, remaining cautious until the stubborn inflation subsides. This decision reflects the Reserve Bank Australia's (RBA) desire to lower consumer prices without jeopardizing the significant employment gains since the pandemic. In a statement, the monetary policy committee emphasized that policy needs to remain restrictive until there is a sustained convergence of inflation towards the target range. Consequently, the Australian dollar performed better immediately after the decision, while yields on three-year bonds experienced an initial decline. A week after unexpectedly declining core inflation data for the second quarter, and amidst interest rate cuts or signals of such actions from global central banks, an eventual rate cut by the RBA later this year is now anticipated. Dwyfor Evans of State Street Global Markets judged that despite the declining inflation in the second quarter, a restrictive stance is still being pursued because the underlying inflation data is considered 'too high.' Evans sees the RBA continuing to lag behind the G10 central banks regarding the normalization of the interest rate environment. Reserve Bank Governor Michele Bullock has repeatedly dismissed speculations about an imminent easing. She forecasts that core inflation will return to the target band of 2-3% only by the end of 2025. Despite a general improvement over expectations, core prices remain significantly above the central bank's target at 3.9%, due to expenses for insurance, education, and rents. Australia's more cautious approach has caused the country to lag in the global easing cycle. Meanwhile, the central banks of Canada, Europe, and England as well as the Federal Reserve have already shifted towards interest rate cuts or hinted at doing so. The RBA also pointed to increased market stability and geopolitical uncertainties that could affect supply chains. Another uncertainty remains the impact of income tax cuts and electricity bill reimbursements introduced on July 1. Governor Bullock recently stated that these measures will not have significant impacts on the RBA's inflation forecasts.