Australia holds rates steady at 4.1%, warns of more tightening

August 01, 2023 (MLN): Australia's central bank on Tuesday held interest rates at 4.1% for a second straight month, saying past increases were working to cool demand, but retained a warning that some more tightening might be needed to curb inflation, as Reuters reported.

Wrapping up its August policy meeting, the Reserve Bank of Australia (RBA) largely left its economic forecasts unchanged from the previous quarter, forecasting headline inflation would return to within its 2-3% target range by late 2025.

Markets had leaned toward a steady outcome given recent data showed inflation had eased for a second quarter and consumer spending was softening.

The Australian dollar extended earlier declines to be 0.9% lower at $0.66, three-year bond futures rose 8 ticks to 96.22, and futures pared back the risk of another hike this year, suspecting that RBA's tightening this cycle could be over now.

Governor Philip Lowe reiterated that higher interest rates were working to cool demand, and will continue to do so, and the pause this month would provide time to assess the impact of the a 400 basis point jump in rates.

"In aggregate, consumption growth has slowed substantially due to the combination of cost-of-living pressures and higher interest rates," said Lowe, whose term will end in September.

In a relief to policymakers, headline inflation slowed more than expected in the second quarter, while retail sales posted their biggest fall this year in June.

However, services inflation, including surging rents, is likely to be sticky, the labor market has defied expectations for a slowdown with the jobless rate staying near 50-year lows at 3.5%, and housing prices continued to climb in July, a positive wealth effect for consumers.

"The longer the RBA leave it, the worse the coincident economic data appears and the harder it is for them to raise rates to tackle inflation," said Emma Lawson, a fixed interest strategist at Janus Henderson.

"We remain in the midst of the peaking of the economy but believe that policy will continue to grip and slow economic growth, with a shallow recession starting early next year not off the table."

Indeed, economic growth is expected to slow to 1.75% next year and average a little above 2% in 2025.

Governor Lowe also removed any reference to the "narrow path", a result that policymakers will bring inflation down without incurring mass unemployment.

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