The Reserve Bank of Australia decided to hold interest rates unchanged at 4.10%. The reasoning for the holding decision is the RBA wants more time to see how the impact of previous interest rates impacts the Australian economy.
The RBA is encouraged that the monthly CPI indicator for July showed another drop. However, it still recognises that inflation is too high and is likely to remain that way for the foreseeable future. In particular, the price rises of services and rent inflation got its attention. The central outlook for the RBA is for inflation to keep falling and to return to the 2 to 3% target early late 2025. The RBA considers the recent data consistent with achieving this target. It recognises that growth has slowed. Inflation is coming down and it anticipates unemployment to increase to 4 1/2% late next year.
The RBA outlined a number of uncertainties. These included the path of firms’ pricing decisions, how wages would respond to slower growth, and the lag effect of existing interest-rate hikes. On top of this, the outlook for household consumption is uncertain with some households experiencing a painful squeeze on their finances. The uncertainty around China’s economy also got a mention due to the close economic ties between Australia and China. So in conclusion, the RBA has played for more time. It wants to see how these economic factors develop, and it wants to allow time to assess the impact of the interest rate hikes it has already made, so this means, going forward, the RBA will be data-dependent and assessing risks as they emerge in terms of the Australian dollar. There is no obvious reason for the Australian dollar moves after this decision, however, moving forward, expect the Australian dollar to react strongly to surprise economic data points that could alter the RBA monetary policy. In particular strong labour, inflation, and growth data will put pressure on the RBA to hike rates and would likely lift the AUD in the near term. See the full RBA statement here.