(Bloomberg) — Australia’s central bank is likely to keep its key interest rate at a 12-year high on Tuesday as it tries to rein in consumer prices that have been supported by an extremely tight jobs market.
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The Reserve Bank will hold the cash rate at 4.35% for a fifth consecutive meeting, economists polled by Bloomberg predicted. The decision will be released at 2.30pm in Sydney, followed an hour later by Governor Michele Bullock’s press conference.
Australia’s policy meeting follows a long-awaited decision by the Federal Reserve last week, when Chairman Jerome Powell signaled he was in no rush to ease monetary policy even after a soft inflation report. Bullock is likely to rely on the same playbook while maintaining her mild hawkish bias in recognizing sticky consumer prices.
Bullock has maintained maximum policy options this year, saying she needs to be confident that price growth is steadily returning to the 2%-3% target and as a result the board is not putting anything in or out. The central bank predicts inflation will only return to target by the end of next year, an extended timeline as it tries to maintain post-pandemic job gains.
“We expect the RBA to quietly maintain its somewhat hawkish stance,” said Carl Ang, a Singapore-based fixed-income analyst at MFS Investment. “Looking ahead, we think the RBA’s rate cut from early 2025 onwards strikes a balance between supporting growth and controlling inflation, thereby helping to mitigate the risk of recession.”
This is consistent with most economists and money market prices.
What Bloomberg Economics Says…
“The board is likely to consider the option of a rate hike given the stronger-than-expected April inflation data. We still think the next rate move will be a cut, but the RBA is unlikely begin to ease until later in 2 H24.
-James McIntyre, economist
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Since the RBA’s last meeting, data shows Australia’s economy has slowed significantly, with GDP shrinking on a per capita basis, while tepid retail sales reflect low consumer sentiment. Stubborn inflation and high borrowing costs are largely to blame.
At the same time, the labor market remains tight with unemployment at 4%, giving policymakers optimism that they can engineer a soft landing.
“An unambiguously strong jobs report has further strengthened our conviction for more for longer,” said Bank of America Corp.’s Micaela Fuchila. “While the labor market is still in good shape, the economy has continued to weaken. The Bank will focus on the impact of fiscal policy on growth and employment before considering easing, in our view.”
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Government income tax cuts and cost of living discounts on electricity bills for Australia’s 10.4 million households will start on July 1. Bullock expects consumers to either save the extra money or put it towards paying down their mortgage, rather than spending it. It does not expect the stimulus to have a material impact on the RBA’s inflation forecasts.
“If you give somebody $300 and you say ‘here’s $300,’ I think psychologically, they think about it differently,” she told lawmakers during parliamentary testimony earlier this month. The energy bill discount “is helping people who are obviously hurting right now, but I don’t think it’s material in terms of our inflation forecast.”
–With assistance from Tomoko Sato and Garfield Reynolds.
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