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The Reserve Bank of Australia has raised its short-term inflation forecast and all but ruled out an interest rate cut this year, joining other central banks in warning that persistent price growth will keep rates higher for longer.
Some economists had expected the RBA to begin cutting rates by the end of the year after the central bank in February noted “encouraging” signs that inflation had started to ease.
But a disappointing reading for the first quarter, when prices rose 3.6 per cent year on year, led some economists to predict that the RBA might reverse course and raise rates by the end of the year.
The RBA on Tuesday held interest rates at 4.35 per cent, noting in a statement that “inflation continues to moderate, but is declining more slowly than expected”. It said it would not rule “anything in or out” on rate moves.
The bank added that rates were expected to remain around the current level until mid-2025 — about nine months longer than projected in February — in its modelling.
The RBA’s more hawkish view pre-empts the budget due to be delivered by treasurer Jim Chalmers next week, raising concerns that any cost of living measures or investment in green energy subsidies and the government’s manufacturing strategy could stoke further price rises.
It also comes as global central banks, led by the US Federal Reserve, have signalled that interest rates are expected to remain higher for longer as they battle to bring down inflation, a shift that has put pressure on the currencies of import-dependent economies.
Australia’s benchmark S&P/ASX 200 stock market index climbed 1.4 per cent on Tuesday, while the Australian dollar weakened 0.5 per cent to A$1.52 per US dollar following the RBA’s announcement.
In its outlook, the RBA revised down its expectations for economic activity as higher interest rates weighed on household spending and boosted savings rates. The central bank raised its inflation forecast for 2024 to 3.8 per cent from 3.2 per cent previously.
While the RBA said inflation would fall to its target range of 2 to 3 per cent by the second half of 2025, it warned that the process of reaching that target was “unlikely to be smooth”.
Michele Bullock, RBA governor, said at a press conference in Sydney that the bank had yet to factor potential interest rate rises into its forecasts. Petrol prices and services inflation — which was 4.3 per cent in the March quarter — have driven the short-term price outlook higher.
“The recent data suggests we need to be alert and vigilant on this,” she said, adding that the bank’s “neutral” rate stance was still “reasonably balanced”.
A tight labour market and wage inflation remain particular concerns, despite signs that consumer demand and retail sales have contracted since the bank raised interest rates 13 times between May 2022 and November last year.
Sean Langcake, an economist with Oxford Economics Australia, said the RBA had set out a strong case for a rate rise even as it opted to hold. “There is clearly a very high bar for raising interest rates further given the ongoing weakness in consumer spending and activity more broadly,” he said. “But another upside surprise on inflation will severely test the RBA’s patience.”
Harry Murphy Cruise, an economist at rating agency Moody’s, said the RBA’s message was slightly more hawkish but questioned the probability of a rate rise, suggesting that “the threat of future rate hikes can sometimes be enough to damp demand without the need to actually pull the trigger”.
“Indeed, we think the most likely outcome is for rates to stay where they are until December,” he wrote in a note.
Additional reporting by William Sandlund in Hong Kong