The Reserve Bank of Australia has left interest rates on hold in December for a ninth-straight meeting but opened the door to a rate cut as soon as February. The central bank kept its cash rate target at 4.35 percent after a two-day meeting, a level it has been at since November 2023. That is despite Australia’s economy recording its weakest annual growth rate in decades in the September quarter and inflation at a more-than-three-year low.
Inflation falls
“Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. Measures of underlying inflation are around 3.5 percent, which is still some way from the 2.5 percent midpoint of the inflation target,” said the central bank in its latest statement.
The most recent forecasts published in the November Statement on Monetary Policy do not see inflation returning sustainably to the midpoint of the target until 2026. “While underlying inflation is still high, other recent data on economic activity have been mixed, but on balance softer than expected in November,” the central bank added.
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Economic growth slowest since early 1990s
Growth in output has been weak. National accounts for the September quarter show that the economy grew by only 0.8 percent over the past year. Outside of the COVID-19 pandemic, this is the slowest pace of growth since the early 1990s.
A range of indicators suggest that labor market conditions remain tight. While those conditions have been easing gradually, some indicators have recently stabilized. The unemployment rate was 4.1 percent in October, up from 3.5 percent in late 2022.
Capital Economics described the statement from Australia’s central bank as “rather dovish”, but maintained its call that the first interest rate cut would not come until May. “While the board had argued in November that it would need to see more than one good quarterly inflation print to be confident that price pressures are easing, the board has since learned that consumption growth isn’t recovering as quickly as it had expected,” Capital Economic’s head of Asia-Pacific Marcel Thieliant said.
Swaps now imply a 63 percent chance of a quarter-point cut at the next meeting in February while fully pricing in two rate cuts by May next year. With the unemployment rate still below the central bank’s estimate of full employment, Thieliant suspects that the bank will want to see a further loosening of the labor market before cutting interest rates.
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