Australia’s central bank holds rates, warns hikes might not be over

SYDNEY: Australia’s central bank held its cash rate steady at 4.35% on Tuesday, saying the economy was slowing in the face of tighter financial conditions but warned it might yet hike again if needed to control inflation.

Wrapping up its June policy meeting, the Reserve Bank of Australia (RBA) said inflation was still too high and it would do whatever necessary to bring it down “including increasing the cash rate target further if required.”

Markets had wagered on a steady outcome following a run of softer domestic data on inflation, consumer demand and employment, while a peace deal in the Middle East to reopen the Strait of Hormuz had pulled down oil prices and lessened inflation risks.

“Resolution of the conflict in the Middle East is at an early stage, and there are plausible scenarios where inflation is higher and activity lower than envisaged under the May baseline forecasts,” said the board in a statement.

“Global oil supply issues will take some time to resolve, maintaining upward pressure on global energy prices and inflation.”

The unanimous decision was largely as expected. The Australian dollar held onto earlier losses and was down 0.3% at US$0.7052, while three-year government bond yields edged up 2 basis points to 4.457%.

Swaps imply around a 30% chance of a move in August, and just a total tightening of 16 basis points for the year, equivalent to less than one rate hike.

The RBA has already raised rates by 75 basis points since February as it struggled to contain stubborn inflationary pressures in the face of surging energy costs. Annual inflation slowed to 4.2% in April but a measure of underlying inflation picked up to 3.4%, above the target band of 2% to 3%.

With interest rates now matching their post-pandemic highs, the economy slowed to a crawl in the first quarter, growing just 0.3% at a quarterly pace as consumers tightened their purse strings. The unemployment rate also hit a 4-1/2-year high of 4.5%.

A record run in house prices has ground to a halt, with the government’s proposed tax changes driving a sharp drop in demand for new investor loans.

The RBA charted a softer course than its global peers during the post-pandemic inflation surge, prioritising hard-won gains in the labour market over rapid tightening. Interest rates peaked at 4.35% early last year before three cuts pulled them back to 3.6%, but that strategy backfired as inflation reared its head again.