Central Bank Holds Rates Steady but Won’t Rule Out More Rises

The Reserve Bank of Australia has held interest rates steady but warned it won’t rule out further rises to combat high inflation.

In its first meeting of the year the central bank board of governors agreed to hold the cash rate at 4.35 per cent but said although recent data indicated inflation was easing, it remained high.

Latest data shows Australia’s inflation sits at 4.1 per cent.

Reserve Bank Governor Michele Bullock warned the board expected it would be some time yet before inflation was sustainably in the target range. 

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks,” Bullock said. “And a further increase in interest rates cannot be ruled out.”

She said inflation was still weighing on people’s real incomes and household consumption growth was weak. So too was investment in housing.

While the RBA’s decision was largely in line with analysts’ thinking, the AMP’s chief economist, Shane Oliver, said the board of governors would not “be rushing into interest rate cuts”.

“Rather (it) will be waiting for more evidence that inflation is sustainably falling to the mid-point of its two to three per cent target range,” Oliver said.

He forecasts the combination of weaker growth and a faster fall in inflation than the RBA currently expects will ultimately force its hand.

▲ RBA Governor Michele Bullock: All smiles, but she won't rule out further interest rate rises.

“We continue to see it cutting rates from mid-year with three 0.25 per cent rate cuts by year-end, taking the cash rate down to 3.6 per cent by December.”

Ray White Group’s chief economist Nerida Conisbee agreed, saying she expected a decline in interest rates “sometime in the first half of the year”.

Conisbee said suggestions by the US Federal Reserve that rates could be cut three times in 2024 had led to a change in sentiment in Australia.

“The big difference between Australia and the US however is the state of the rental market,” she said.

“Australian rental increases have settled down a bit but there remains a shortage of rental properties. High construction costs are preventing more properties being built and high interest rates are leading to relatively lacklustre investor activity.

“These rental increases are feeding into Australian inflation, further contributing to the lack of rental properties.”

Oxford Economics’ head of macroeconomic forecasting, Sean Langcake, said in warning of further rate rises, the RBA had retained a hawkish outlook.

“We see this as an attempt to guide market expectations, which have become overly dovish,” Langcake said.

“Given the very tolerant approach to inflation to date, it would take an enormous upside surprise to spur the bank back into action, and we think more hikes are only a remote possibility.”