RBA Maintains Interest Rate Amid Strong Economic Activity

By Devayani Sathyan
BENGALURU (Reuters) – Australia's central bank will maintain its key interest rate at 4.35% on Tuesday and for the rest of the year, according to a Reuters poll of economists, due to strong economic activity and persistent core inflation, which necessitate a careful approach.

Consumer price inflation fell to 2.8% last quarter, within the Reserve Bank of Australia's 2-3% target for the first time in three years; however, core inflation, which excludes volatile components, remains high.

During its post-COVID tightening cycle, the RBA raised rates by 425 basis points from 0.10% to 4.35%, a smaller increase than many peers, despite prolonged inflation risks. This decision aimed partly to support job creation as part of the central bank's mandate, keeping the jobless rate relatively stable between 4.0% and 4.2% since April.

With the employment market robust and interest rates at a lower peak, the RBA is expected to loosen policies more slowly compared to other developed nations' central banks, aligning more with Asian counterparts.

All 30 economists surveyed in the Oct. 30-31 poll forecasted the RBA to maintain its official cash rate at 4.35% at the conclusion of its meeting on Nov. 5. Nearly all expected no changes during the December meeting either.

Craig Vardy, head of fixed income at BlackRock Australasia, stated, "We are not expecting the RBA to change the official cash rate. However, we might see a slight shift in their language from hawkish to more balanced."

The data appears to align with the RBA's views on core inflation remaining too high to consider cutting rates in 2024, projecting that early 2025 is a more realistic timeframe for potential cuts.

Leading banks – ANZ, CBA, NAB, and Westpac – are predicting no changes this year, but expect the RBA to cut rates at the February 2025 meeting. Approximately 70% of respondents anticipating cuts next year expect a decrease of 25 basis points to 4.10% in February, with some predicting a larger cut to 3.75%.

Markets expect the earliest cut to be in April. Survey projections indicate the RBA cutting rates by 75 basis points next year, ending 2025 at 3.60%, compared to a 225 bps decrease expected from the U.S. Federal Reserve.

My Bui, economist at AMP, remarked that core inflation is unlikely to fall within the target band until mid-Q3, indicating the RBA will not rush to significantly cut rates without a recession, predicting three rate cuts next year.

The potential rate cuts would bring rates back toward a normal level above 3%.

Given that the Fed is expected to ease rates more rapidly than the RBA, the Australian dollar is forecasted to recover its year-to-date loss of 3.5% by the end of January, stabilizing around $0.68, according to a separate Reuters poll of forex strategists.