RBA keeps cash rate at 4.1%, open to more hikes.

The Reserve Bank of Australia (RBA) opted to keep its monetary policy unchanged today, citing factors such as global economic uncertainties, household spending, and inflation forecasts as reasons to maintain the current stance.

Key Insights

• The RBA chose not to unsettle the markets by keeping the cash rate steady at 4.10%.
• In spite of worsening macroeconomic conditions, the RBA indicated a potential for further increases in interest rates.
• The global economy, household spending, the labor market, and inflation will continue to be key considerations.

RBA Interest Rate Decision

As expected, the Reserve Bank of Australia (RBA) kept the cash rate unchanged at 4.1% this month. This decision turned investors' attention to the RBA Rate Statement.

Key points from the RBA Rate Statement included:

Inflation:

1. Inflation has peaked but is expected to remain elevated for some time.
2. Service prices, particularly rent prices, are driving inflationary pressures.
3. The RBA anticipates inflation to return to the target range of 2-3% by late 2025.

The Economy and the Labor Market:

1. The economy is currently below trend and is likely to stay that way for a while.
2. High inflation is impacting consumer purchasing power and dampening consumption.
3. The labor market remains tight, but the weaker economic environment is expected to push the unemployment rate to 4.5% by 2024.
4. Wage growth has accelerated but remains consistent with the inflation target.

Uncertainties:

• Service price inflation has shown resilience globally, and Australia may experience a similar trend.
• The outlook for household spending is uncertain, despite some relief from higher house prices, savings, and higher interest income.
• The Chinese economy represents another source of uncertainty.

The RBA concluded that further monetary policy tightening would depend on data, while taking ongoing risks into account. Key considerations will include the global economy, household spending, inflation, and labor market expectations. Importantly, the RBA did not signal the end of the tightening cycle and left the possibility of more rate hikes open.

AUD/USD Reaction

Ahead of the RBA decision, AUD/USD initially rose but later fell in response to the rate decision and statement. The pair reached a post-decision low before recovering slightly.

Up Next

Market risk sentiment will be influenced by Eurozone services PMIs and US factory orders data. The Eurozone services PMIs, if showing a larger-than-expected decline, would indicate a deteriorating macroeconomic environment. US factory orders will also be a factor in market risk sentiment.

Throughout the day, commentary from ECB and Fed officials will need consideration. ECB President Lagarde will likely address high inflation concerns, while other ECB Board members may provide mixed signals. There are no scheduled speeches from FOMC members, but media comments could impact dovish Fed expectations.