Why RBA board is keeping rates on hold as inflation remains high

RBA Governor Michele Bullock is keeping interest rates on hold for now — but she’s far from confident. This is what we can expect next. Who do you believe?

Who do you choose to believe – the Reserve Bank of Australia or people putting money where their mouth is?

On Tuesday, Michele Bullock couldn’t have been clearer in response to my question about the short-term outlook for interest rates.

The RBA board couldn’t see a case for a cut this side of Christmas, she explained. Sorry everyone, she added.

Based on her tone, no-one should anticipate a reduction in February, either.

Bullock was trying to temper the enthusiasm of money markets, which had priced in a cut this year.

Interestingly, even after the Governor’s comments, cash rate futures still implied a move downwards before Santa arrives.

How quickly things change. This time last week all the talk was that the RBA would have to raise interest rates to bring down inflation faster.

But on Monday, as the central bank board was starting its two-day meeting in Sydney, stock markets around the world were tanking. That led some people to ask whether Bullock would have to cut rates immediately.

Though the central bank’s charter does speak of contributing to “the economic prosperity and welfare of the people of Australia”, that does not translate into setting monetary policy to prop up share prices and superannuation returns.

The RBA didn’t give much attention to the stock market panic. Turns out a cut was not even canvassed at its meeting. But “serious consideration” was given to an increase, she said.

The cash rate is on hold after a wild night overseas on Wall Street saw stocks plunge and the ASX has reacted. Picture: Getty

Because inflation remains the number one priority.

Last week’s consumer price index outcome was very close to the RBA’s forecast.

Bullock had no compelling reason to hit the brake again by raising rates.

The RBA board will meet again in six weeks. No change is the likely result.

By the time of the November meeting, which concludes on the day of the Melbourne Cup, the RBA will have seen the third-quarter 2024 CPI, which the Australian Bureau of Statistics will publish October 30.

If you believe money markets, a rate cut could well be the favourite going into that meeting.

But as the RBA said today, monetary “policy will need to be sufficiently restrictive until the board is confident that inflation is moving sustainably towards the target range.”

And right now Bullock & Co are far from confident. If a lot can change in a week, imagine how much can change in three months.

Originally published as Why RBA board is keeping rates on hold as inflation remains high