The Reserve Bank of Australia has held interest rates for the sixth time in a row as it acknowledged recent market volatility that wiped $100 billion from the local sharemarket.
The board announced that the cash rate target was unchanged at 4.35 per cent and the interest rate paid on Exchange Settlement balances also unchanged at 4.25 per cent.
The announcement came the day after a horror day for investors on Monday when the S&P/ASX 200 plummeted 3.7 per cent to a two-month low, a $102-billion drop in value for the index—the biggest one-day drop since May, 2020.
In its statement after the August meeting, the first since June, the RBA board said inflation had “fallen substantially since its peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance”.
“But inflation is still some way above the midpoint of the 2–3 per cent target range,” it said.
“In underlying terms, as represented by the trimmed mean, the CPI rose by 3.9 per cent over the year to the June quarter, broadly as forecast in the May Statement on Monetary Policy (SMP).
“But the latest numbers also demonstrate that inflation is proving persistent. In year-ended terms, underlying inflation has now been above the midpoint of the target for 11 consecutive quarters. And quarterly underlying CPI inflation has fallen very little over the past year.”
At a post-announcement news conference, Reserve Bank governor Michele Bullock said interest rate cuts in the next six months “are not in the agenda”.
“What I’m trying to tell the markets today is that I think that probably expectations for interest rate cuts are a little bit ahead of themselves,” she told media.
Bullock also said the board had given a rate increase “very serious consideration” at the meeting.
“I think the board felt that the risks associated with raising at this point—as opposed to holding where we are and just staying where we are—warranted the second alternative, which is what we did.”
The board said the economic outlook was uncertain and recent data had shown that the process of returning inflation to target had been slow and bumpy.
There also remained a high level of uncertainty about the overseas outlook, the board said.
The outlook for the Chinese economy had softened and this “has been reflected in commodity prices”.
“Some central banks have eased policy, although they remain alert to the risk of persistent inflation.
“Globally, financial markets have been volatile of late and the Australian dollar has depreciated.
“Geopolitical uncertainties remain elevated, which may have implications for supply chains.”
PropTrack director, economic research, Cameron Kusher said that with the June quarter inflation data being more aligned with expectations, inflationary concerns have been allayed for the time being.
“The rate of growth in home prices has consistently slowed over the past five months and we continue to see the lowest number of annual dwelling approvals in more than a decade,” Kusher said.
“Despite slowing price growth, more properties are being listed for sale and sales volumes remain robust. Stable interest rates are likely to support vendor and purchaser confidence as we head into the busier spring period.
“While we should remain cautious to the prospect of interest rates rising if inflation doesn’t slow, economic data from the US published last week showed a significant weakening of the labour market and heightening expectations of an economic slowdown in the US.
“This could reduce the likelihood of further interest rate rises here and potentially result in rates being cut sooner.”
Monday’s ASX meltdown came amid fears of a US recession, which dragged down markets globally after Friday’s disappointing July US jobs report, CNBC reported.
Adding to the rush for the exits was heavy unwinding of the yen carry trade, sparked by a strengthening Japanese currency.
A carry trade is a strategy where investors borrow money in a low-interest currency to invest in higher-yielding assets in another currency, aiming to profit from the interest rate differential.
On Wall Street, stocks plummeted in Monday trading. The Dow Jones Industrial Average posted its worst day in nearly two years, shedding 1033.99 points or 2.6 per cent to end at 38,703.27.
The tech-heavy Nasdaq Composite retreated 3.43 per cent and closed at 16,200.08, while the S&P 500 gave up 3 per cent to end at 5186.33.
The blue-chip Dow and the broader S&P 500 indices recorded their biggest daily losses since September 2022, CNBC said.
Meanwhile Japan’s stockmarket posted its worst drop since Wall Street’s Black Monday in 1987. The Nikkei index tumbled 12.4 per cent on Monday but had retraced some of those losses in intraday trading on Tuesday, as did the ASX200 in Sydney.
Meanwhile, a Productivity Commission inquiry will investigate Australia’s housing crisis, targeting slow approval processes and long construction times.
The Federal Government’s independent economic adviser’s scrutiny comes as doubt grows that the national target of 1.2 million homes to be built during the next five year is realistic and achievable.
HIA chief economist Tim Reardon said up to half of the cost of a new house and land package was government taxes, fees and charges.
“Constraints on the industry reflect the large impost governments place on home building in Australia, not the efficiency with which the industry operates,” Reardon said.
“The detached home building in Australia is one, if not, the most efficient in the world. A workforce that is largely engaged as subcontractors and are paid to complete a task, not by the hour, has developed an efficient industry.
“An inquiry into productivity in the sector is important to highlight the imposts that governments continue to add to home building, which cause delays, add costs and reduce labour productivity.”
