The RBA dashes hopes of interest rate relief this year, but shares were unaffected: Here’s why

Despite the start of interest rate cuts overseas and a rout in global stock markets that’s being closely monitored by the RBA board, it delivered another ‘hawkish hold’ on rates.

RBA governor Michele Bullock prepares to begin her press conference on Tuesday. Picture: AAP

The Reserve Bank has all but ended hopes of interest rate relief in Australia this year.

Despite the start of interest rate cuts overseas and a rout in global stockmarkets that’s being closely monitored by the RBA board, it delivered another “hawkish hold” on rates – as was expected.

In fact the central bank gave no sign that it was any closer to dropping its tightening bias, which will leave pressure on markets and the minority of economists who are calling for a cut by year’s end.

In normal times this kind of push-back on rate cuts by the RBA would have hit the sharemarket.

But the ASX was more focused on Tuesday’s massive 10 per cent rebound in Japan’s Nikkei 225. It had plunged 12.4 per cent on Monday as US recession fears catalysed a nascent “unwind” of the long established yen “carry trade” that started as the Bank of Japan began to hike.

However, government bond yields continued to rebound as the RBA delivered its hawkish message.

While shifting away from Monday’s “panic mode” pricing of 42 basis points of cuts in the RBA cash rate target by December and 100 basis points of cuts by July, the money market still had 23 basis points of cuts priced by December and 74 basis points by July as of Tuesday.

But rate cuts in Australia this year are clearly unlikely, according to the RBA.

Unlike the US Federal Reserve Open Market committee, which said last week that the “risks to achieving its employment and inflation goals continue to move into better balance”, the RBA board said recent data “reinforced the need to remain vigilant to upside risks to inflation”.

Updated guidance from the board was that “policy will need to be sufficiently restrictive until the board is confident that inflation is moving sustainably towards the target range”.

In her post-meeting press conference, RBA governor Michele Bullock said the board gave “very serious consideration” to a rate rise and only considered a “hike or a hold” at its August meeting.

Moreover, she said the RBA “will increase interest rates” again if needed.

“We want to try to keep employment growing if we can and the judgment of the board was that keeping the interest rate where it is and making sure that people understand that a rate cut is not on the agenda in the near term, given what we know, that continued pressure will help to keep demand coming back into line,” Ms Bullock said.

“That’s the judgment that the board’s made.

“But I should say that they are vigilant to the upside risks and if it does appear that inflation is not trending the way we are forecasting, then they will if needed increase interest rates.”

Consistent with continued guidance that “returning inflation to target is the priority”, the governor said there was “still a risk that inflation will take too long to return to target”.

“Make no mistake, inflation is still too high and the board does remain concerned about the degree of excess demand in the economy,” she said.

Asked in her press conference about the RBA’s definition of “near term” on monetary policy, Ms Bullock said: “I’m going to obviously preface this by saying no forward guidance.”

The scars run deep after former governor Philip Lowe was lambasted for saying, in the early stages of the pandemic, that the RBA didn’t expect rates to rise until 2024.

But Ms Bullock went on to say the RBA board disagreed with expectations of rate cuts, even within six months.

A rate cut at the February board meeting has been the consensus among economists for some time.

“The board’s feeling is that the market path at the moment is pricing in interest rate reductions by the end of this year,” she said.

“I think the board’s feeling is that the near term … by the end of the year and the next six months … given what the board knows at the moment, and given what their forecasts are, that doesn’t align with their thinking about interest rate reductions at the moment.”

Logically, the RBA board doesn’t expect a recession that would generate a need for rate cuts.

“The markets are saying that they expect us (to cut rates) … and 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,” Ms Bullock said.

“Are we heading for a ­recession?

“I don’t believe so, and the board doesn’t believe so because we still believe that we’re on that narrow path.

“Having said that, we are data-dependent and there’s a number of things, as we mentioned in the statement of monetary policy, that could result in the economy slowing much more quickly and inflation coming down much more quickly than we expect.”

Ms Bullock said the RBA needed to be alert to such risks and “if they come to pass then, yes, interest rate cuts would be on the agenda, but given what we know at the moment, and the forecasts, as I said earlier … in the near term, interest rate cuts are not on the agenda.”

Citi chief economist Josh Williamson said the RBA defied the doves with its concerns about ­inflation.

“While the board was not expected to hike after last week’s downside inflation surprise, the next question was whether it was ready for a dovish pivot,” he said.

“But the policy statement was appropriately hawkish, continuing to state that ‘inflation is proving persistent’ followed by a reference to underlying inflation being above the target midpoint for 11 consecutive quarters.

“Most important to us was the quote “quarterly underlying CPI inflation has fallen very little over the past year”.

However, AMP chief economist Shane Oliver said that while a first rate cut from the RBA was likely to come in February “there is a high risk” it would need to start cutting rates before year’s end if US recession fears continued to rise, unemployment in Australia rose and the sharemarket falls continued.

Originally published as The RBA dashes hopes of interest rate relief this year, but shares were unaffected: Here’s why