Reserve Bank of Australia keeps rates unchanged but warns that further hikes remain on the table

Australia’s central bank held interest rates unchanged at twelve-year high at 4.35% but warned that a further rate hikes could not be ruled out as inflation is still elevated.

Comments from the central bank signal that the policymakers are not in a hurry to start easing policy anytime soon and relatively hawkish tone suggests that the central bank is likely to push out the expected timing of a first rate cut from August to September.

Although the markets were optimistic due to the fact that inflation had eased by more than expected in the fourth quarter, the RBA indicated it was still not confident that inflation was on a sustainable path towards its 2-3% target.

The central bank trimmed its forecasts for inflation and economic growth but stressed that demand was still running ahead of supply, adding to signals that policymakers won’t be in hurry to start cutting rates.

Australia’s inflation fell to a two-year low of 4.1% in the fourth quarter from the 2022 peak of 7.8%, but it is still well above target, despite RBA’s sharp increase of interest rates by 425 basis points in total since May 2022, which significantly slowed the economy, the labor market has started to loosen, and consumer spending softened amid high cost of living and mortgage rates.

The RBA is following several major central banks in resisting pressure for early cuts and many economists doubt that the central bank is even thinking about rate cuts at the moment, but hope that required conditions for the first rate cut will be reached in September.