Australia's central bank kept interest rates unchanged at its final meeting of the year as cooling inflation and a softening labor market suggest its policy tightening to date is gaining traction.
The Reserve Bank maintained its cash rate at a 12-year high of 4.35% — as forecast by all but one economist — at Tuesday's meeting. It cited a broader downtrend in inflation and lags in the transmission of tightening between May 2022 and November 2023 in explaining the decision.
"Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks," RBA Governor Michele Bullock said in a post-meeting statement.
The currency fell 0.5% and the policy-sensitive three-year government bond yield erased earlier gains to trade at 4.04%.
The RBA has proved to be a careful hiker in the current campaign, even as elevated services prices mean core inflation remains sticky. Australia's 4.25 percentage points of hikes is 1 point below that delivered by the US and New Zealand.
Underlining that, markets are pricing in cuts from the Fed next year, whereas there remain bets on tightening by the RBA. Heading into today's meeting, swaps traders were wagering there was a better than 40% chance Australia would raise its key rate again by mid-next year.
The RBA is trying to bring the economy in for a soft landing. Bullock and her colleagues have so far been successful, with data on Wednesday expected to show the A$2.3 trillion ($1.5 trillion) economy maintained its momentum.
At the same time, monthly inflation slowed more than expected in October — the first reading for the fourth quarter — in a welcome sign for policymakers. Another reason for RBA caution is Australia's highly geared borrowers who are overwhelmingly on variable rates, unlike the US where most mortgages are fixed for 30 years.
Data on the economy has been mixed lately. The housing market is at record highs, home loans jumped in October and business confidence is still resilient. Also helping the economy is surging population growth that's boosting demand for everything from housing to transport and dining out.
On the flip side, consumer sentiment is in the doldrums while the labor market is beginning to show signs of loosening, with economists predicting the jobless rate will soon rise from the current ultra-low 3.7%. Figures this week showed job ads dropped for a third straight month in November to be down almost 17% from a year earlier.
Most economists reckon the RBA is done with tightening in this cycle, though a few see the risk of another hike early in 2024.
Australia's central bank doesn't meet in January. In the following month it will introduce a new system under which the rate statement will be signed by a monetary policy committee and Bullock will hold a post-meeting press conference. RBA meetings will also be reduced to eight from 11 per year.
Source : Bloomberg
