RBA keeps interest rates at 4.35pc amid US recession fears, stubborn local inflation

The Reserve Bank has warned it’s prepared to keep interest rates at elevated levels for some time, with inflation tipped to remain high for the foreseeable future.

The Reserve Bank says that there won’t be any cuts to the cash rate in the next six months as inflation continued to prove sticky after it moved to keep interest rates unchanged for a sixth consecutive meeting.

The decision on Tuesday leaves the cash rate at 4.35 per cent — its highest level since 2012 — for the sixth consecutive meeting as the Reserve Bank continues its ‘wait-and-see’ approach.

It was widely expected by economists and markets after last week’s inflation results landed broadly as forecast.

RBA governor Michele Bullock said the central bank has taken a “near-term” rate cut off the table, meaning there will be no cut or relief to mortgage holders in the next six months.

“Based on what I know today and what the board knows today, what we can say is that a near-term reduction in the cash rate doesn’t align with the board’s current thinking,” she said.

“We’ve seen from overseas experience how bumpy inflation can be on the way down and across the economy. We need to see demand and supply coming back into better balance.”

Ms Bullock said at her press conference on Tuesday that the news was not what households and small businesses wanted to hear, but it was the best move to ensure that inflation returned to its 2-3 per cent target.

The RBA’s statement said recent data had reinforced the need to remain vigilant to upside risks to inflation and that the board is “not ruling anything in or out”.

“Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range,” Ms Bullock said. “The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

A rate hike was considered, but Ms Bullock said the board decided against it because there were risks associated with a raise currently. It would continue to monitor developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market.

The case for a hold was strengthened last week when headline inflation rose to 3.8 per cent in June, in line with RBA forecasts, while its preferred measure, trimmed mean inflation, fell for the sixth consecutive quarter to 3.9 per cent.

On Tuesday, the RBA’s statement forecast inflation to return to the target range of 2-3 per cent late in 2025 and approach the midpoint in 2026, albeit with a lower cash rate assumption profile than previously assumed.

Deloitte Access Economics partner Stephen Smith said the decision was right for businesses and households and reduced the risk of a recession in Australia amid jitters in the US.

“It is now looking increasingly certain that the next move in the cash rate will be down, not up, with the RBA clearly concerned that its quest to stamp out inflation might derail an emerging recovery,” he said.

“The RBA is walking a tightrope, balancing its twin objectives to fight inflation and maximise employment in the economy. While we need to remain vigilant on inflation, the pivot to investing for growth is now the priority.”

The S&P/ASX 200 drifted away from its intraday high of 7713.7 to be up 0.4 per cent to following the cash rate decision and after it plunged 3.7 per cent on Monday, wiping $102bn off the value of the index in the biggest one-day drop since May 2020.

Ms Bullock said the board discussed the sharemarket drop, but added that it did not play a role in the decision itself.

Betashares chief economist David Bassanese said if sharemarket volatility subsided and fears around a US recession abate, there was still a risk the RBA could lift rates in November if September inflation surprises on the upside.

“Despite the increased risk of lower US interest rates in coming months, I no longer anticipate the RBA will be able to cut interest rates this year – but nor do I expect interest rate increases,” he said.

“Instead, I now expect the first rate cut will come in February next year, following the December quarter CPI report – which I anticipate will show annual trimmed mean inflation slowing to 3.25 per cent, or a bit lower than the RBA’s latest forecast of 3.5 per cent.”

Those sharemarket losses were fuelled by concern the US economy was not as strong as thought following a run of weaker data, hinting that the Federal Reserve had left rates too high for too long.

The Commonwealth Bank and Westpac had forecast a 25bps cut in November. ANZ Bank did not expect one until February and the National Australia Bank expected households would have to wait until May 2025.

CBA chief economist Gareth Aird said the tone from the RBA was a little more hawkish than expected, but added that it would ultimately be the data that determines the outlook for monetary policy.

“Our base case in unchanged. We continue to see the RBA delivering a first 25bp interest rate cut in November 2024. This is premised on a third quarter trimmed mean CPI of 0.8 per cent (or lower) and an ongoing upward trend in the unemployment rate,” he said.

“The wriggle room on the data configuration that would see the cash rate cut in November is still tight. And the risk clearly sits with interest rate relief not arriving until the first half of 2025.”

The RBA has lifted the cash rate 13 times to 4.35 per cent between May 2022 and November 2023.