As expected, the Reserve Bank of Australia (RBA) kept its official cash rates at a 12-year high of 4.35% for a sixth meeting in a row in August.
The central bank emphasized that high inflation remains a concern, saying that it has “fallen substantially” but is “proving persistent” above the 2% – 3% target range. The closely watched quarterly underlying CPI has also “fallen very little” over the past year.
The RBA detailed,
“Data have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out.”
At the same time, the central bank recognized that economic momentum has slowed, with the unemployment rate rising and businesses seeing pressure. The RBA said household consumption may pick up more slowly than expected and lead to lower output growth and a “noticeable deterioration” in the labor market.
In its quarterly economic projections, the RBA noted that inflation is expected to hit the 2%-3% target range by late 2025 and hit midpoint by 2026. This is a slight revision from the May forecasts when inflation was expected to hit target by 2025.
The central bank also expects to see higher unemployment and below-potential growth throughout the forecast period, which would help reduce excess demand and help return inflation to target.
The quarterly unemployment rate is seen at 4.3% by year-end (up from 4.2% in May) before rising to 4.4% by 2025.
Headline inflation could ease to 3.0% by the end of the year, much slower than the 3.8% projections in May, while trimmed mean inflation may dip to 3.5% (up from 3.4% in the May projections).
On cash rates, the RBA expects a 25bps rate cut by early 2025 and a decline to 3.3% by the end of 2026. This is a lower path compared to the May projections showing interest rates at 3.8% by 2026.
Link to RBA’s August Statement on Monetary Policy
In her presser, the RBA Governor Michele Bullock revealed that members had discussed a rate hike as an option, but eventually decided that the current cash rate levels were “appropriate.”
Bullock repeated their concerns over high inflation, saying that progress “has been slow for a year now” and that there are still risks that “inflation takes too long to return to target.”
More interestingly, the RBA head honcho effectively ruled out a rate cut in the next six months.
She noted that the markets are “pricing in interest rate reductions by the end of this year” but that a near-term rate cut “doesn’t align with the board’s thinking.” In fact, Bullock thinks interest rates “might need to stay high for longer.”
Link to RBA Gov. Bullock’s presser
Australian dollar vs. Major Currencies: 5-min
Overlay of AUD vs. Major Currencies Chart by TradingView
Asian session traders took cues from the U.S. session’s upswings and pushed AUD higher early in the day.
The Australian dollar soon gave up its early gains, however, likely due to a lack of fresh catalysts or traders staying on the sidelines ahead of RBA’s event.
The Aussie traded higher about 15 minutes before the RBA’s decision and maintained its gains for about an hour after the official statement emphasized the economy’s sticky high inflation.
AUD then traded in ranges and saw renewed buying pressure when RBA Gov. Bullock’s speech pushed back against interest rate cut calls. Unfortunately for the bulls, the Aussie didn’t sustain its gains and the comdoll fell back to its pre-RBA levels by the London session open.