Australia’s central bank, the Reserve Bank of Australia (RBA), has decided to keep interest rates steady at 4.35% during its February policy meeting. However, the RBA also warned that a future rate hike cannot be ruled out, highlighting concerns over persistently high inflation. The central bank emphasized the need for further evidence of cooling price pressures before considering any adjustments to interest rates.
While inflation has eased more than anticipated in the fourth quarter, the RBA remains cautious, stating, While recent data indicate that inflation is easing, it remains high…The Board needs to be confident that inflation is moving sustainably towards the target range. The RBA has increased rates by 425 basis points since May 2022 to tackle stubbornly high inflation. Despite a decline to a two-year low of 4.1% in the fourth quarter, inflation is still well above the central bank’s target range of 2-3%.
Nevertheless, the Australian economy has slowed considerably, with the labor market starting to weaken and consumer spending remaining subdued due to living costs and high mortgage rates. The outlook for overseas monetary policy has also shifted since the RBA’s last meeting in December, with markets now pricing in potential rate cuts from the Federal Reserve and the European Central Bank. However, most economists do not expect the RBA to provide any rate relief until September.
The decision to hold rates steady was largely in line with market expectations; however, the possibility of further rate hikes led to a 0.3% increase in the Australian dollar. Bond futures were also affected, declining by 5 ticks to 96.3.
As the RBA continues to monitor economic conditions and evaluate risks, it remains committed to its target of bringing inflation back within the desired range. The central bank’s decision reflects a cautious approach to ensure sustainable inflation and overall economic stability.
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