RBA Holds Rates a Third Time, But When are Those Cuts

Australia’s 3.8 million mortgage holders breathed another collective sigh of relief as the Reserve Bank of Australia again held interest rates at a 12-year-high of 4.35 per cent.

While largely expected by economists, it’s the third meeting in a row—and the second this year—the RBA’s board of governors have agreed to leave rates alone.

In a statement released after a two-day meeting, the board said monthly inflation fell to 3.4 per cent in January and that high interest rates were helping to balance demand and supply.

The central forecasts are for inflation to return to the target range of 2–3 per cent in 2025, and to the midpoint in 2026.

But it’s the wording of the board’s final paragraphs that had economist sitting up to take notice.

“While recent data indicate that inflation is easing, it remains high,” the statement said.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out.”

Then, at a media conference after the announcement, RBA governor Michele Bullock agreed the board had changed its language around the need for further interest rate rises.

In past meetings, for example, the board has ended its statement with “a further increase in interest rates cannot be ruled out”.

“We’re not confident enough to say we can rule out further interest rate changes,” Bullock told reporters. “But we do think we are on the path to get ourselves back to inflationary targets within our forecast bearings.”

▲ CoreLogic says higher services inflation remains the focus for the RBA.

That has not gone unnoticed.

AMP chief economist and head of investment strategy Shane Oliver said the RBA’s cautious comments were consistent with it still waiting to be “confident that inflation is moving sustainably towards the target range”.

“All of which imparts a slight hawkish tone with the RBA being in no rush to start cutting rates.”

Against this though, Oliver said, the final paragraph of its post-meeting statement was in a clear dovish direction, suggesting the RBA had moved to a neutral stance on interest rates.

CoreLogic Asia Pacific research director Tim Lawless said most agreed the RBA’s next move on rates would be down, although the timing of any cuts remained uncertain.

“Nonetheless, the hold decision, alongside lower inflation and a growing expectation that interest rates will reduce later this year, should help to provide a further lift in confidence,” he said.

CoreLogic believes higher services inflation remain the focus for the RBA. 

“The RBA expects services inflation to decline only gradually, making the timing for a rate cut highly uncertain and dependent on further progress in reducing inflation emanating from the services sector,” Lawless said.

Oliver agreed the road to rate cuts would remain a bumpy one.

“Our assessment remains that the combination of weaker growth and a faster fall in inflation than the RBA currently expects will ultimately force its hand,” he said.

He said the first cuts could come in June, with three 0.25 per cent rate cuts by year end, taking the cash rate down to 3.6 per cent by December.