SYDNEY (Reuters) – Australia’s central bank held interest rates steady on Tuesday as expected, but cautioned that a further increase could not be ruled out given inflation was still too high and it needed to see more evidence that price pressures were cooling.
Wrapping up its February policy meeting, the Reserve Bank of Australia (RBA) kept rates at a 12-year high of 4.35%, having last lifted them by a quarter point in November.
Markets had wagered heavily on a steady outcome given inflation had eased by more than expected in the fourth quarter and suspected rates have peaked.
The slight chance of another rate hike, however, sent the Australian dollar 0.3% higher to $0.6504, while three-year bond futures were down 5 ticks to 96.3.
“While recent data indicate that inflation is easing, it remains high… The Board needs to be confident that inflation is moving sustainably towards the target range,” said the RBA Board in a statement.
“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out.”
The RBA has jacked up interest rates by 425 basis points since May 2022 to tame stubbornly high inflation. Although inflation fell to a two-year low of 4.1% in the fourth quarter and has moved some way off the peak of 7.8% from late 2022, it is still well above the central bank’s 2-3% target band.
However, the economy has slowed to a crawl, the red-hot labour market has started to loosen and consumer spending remained soft amid the costs of living pressures and high mortgage rates.
Taking off the pressure to hike is the drastic change in overseas monetary policy outlooks since the RBA last met in early December. Markets are now pricing in a total easing of 114 basis points and 123 bps from the Federal Reserve and the European Central Bank, respectively, this year.
However, most economists don’t expect any rate relief from the RBA until September.