Australia: Reserve Bank holds fire again in August
At its meeting on 5–6 August, the Reserve Bank of Australia (RBA) decided to keep the official cash rate (OCR) at 4.35%, meeting market expectations and marking the sixth consecutive hold. Moreover, the Bank left the interest rate on exchange settlement balances at 4.25%.
The decision to stand pat primarily reflected sticky above-target inflation: Despite receding from their peak in 2022 amid tighter financing conditions, price pressures continue to exceed the upper bound of the RBA’s 2.0–3.0% inflation target. Moreover, the Bank forecast a slightly slower return of inflation to target than in May, as the gap between aggregate demand and supply has proven larger than previously expected. The RBA also highlighted persistent upside risks to the inflationary outlook. That said, stable inflation expectations and sluggish economic momentum likely dissuaded a hike.
In its communiqué, the Bank restated its commitment to returning inflation to the target range and stated that “it will be some time yet before inflation is sustainably in the target range”. Moreover, the RBA was more hawkish than in past months and, in a subsequent statement, Governor Michele Bullock noted that it is unlikely that the Bank will embark on a monetary policy loosening cycle by year-end.
Most of our panel expects the OCR to be kept at its current level until year-end. That said, a minority of our panelists still see room for both a further hike and minor cuts before year-end. The Bank will convene next on 23–24 September.
Andrew Ticehurst, analyst at Nomura, expects the OCR to remain unchanged:
“Our cash rate forecasts remain unchanged, with a first 25bp rate cut in February 2025 and subsequent 25bp cuts in May and August to a neutral-ish 3.60%. We think a negative global shock would need to fully unfold – which would likely push inflation below the midpoint of the target band – for the RBA to lower the cash rate below neutral.”
United Overseas Bank’s Sue Ann Lee, meanwhile, has penciled in a cut in Q4:
“All in all, while it is not our base case for the RBA to hike rates; a combination of sluggish growth and slow progress on inflation will likely mean the RBA will have to stay on a ‘higher for longer’ gear. We are penciling the first rate cut in Nov, though this remains highly data dependent and there is increasing risk of a push back in timing.”