AUSTRALIA’S central bank held its key interest rate at a 12-year high on Tuesday (Sep 24) as it tries to subdue stubborn price pressures that are preventing it from joining a global easing cycle.
The Reserve Bank of Australia (RBA) – as expected – kept its cash rate at 4.35 per cent for a seventh straight meeting and restated it is not “ruling anything in or out” on policy. The RBA has sought to hold onto significant post-Covid job gains and as a result, inflation is taking longer to come down.
“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome,” the rate-setting board said.
The Australian dollar was little changed after the decision at 68.58 US cents, as were yields on policy sensitive three-year bonds.
Governor Michele Bullock will hold a press conference at 3.30 pm Sydney time.
The RBA’s decision highlights its outlier status compared with peers. Last week, Federal Reserve chair Jerome Powell led his colleagues to an outsize rate cut designed to preserve the strength of the US economy.
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Governor Bullock has repeatedly pushed back against talk of near-term easing, reflecting forecasts that inflation will only return to the 2 to 3 per cent target in late 2025. That’s brought her into the political firing line from members of the ruling Labor party and minority parties that are pushing for a rate cut.
Bullock said the board wants to be confident that price growth is moving sustainably back to the bank’s goal.
At 3.9 per cent, core prices remain well above target, driven largely by non-discretionary spending such as insurance, education and housing. Australia’s job market remains in good shape with unemployment at a still-low 4.2 per cent.
The RBA’s hawkish stance combined with political jockeying over a pending reform of its board structure has spurred local criticism of the bank.
The left-wing Greens party is demanding the government use its reserve powers to order the RBA to cut rates as a condition to support legislation that would split the board in two – one for monetary policy and the other for governance. The government dismissed the Greens’ suggestion as “crazy”.
One of the factors behind persistent price pressures in the economy is a monetary-fiscal policy mismatch, economists say. While government largess has helped keep Australia out of recession and boosted the labour market, it is also making the RBA’s job harder.
The government has rejected suggestions that its policies are helping fuel price growth.
Westpac Banking this week released research showing new public demand rose to a record 27.3 per cent of the real economy in the June quarter from a pre-pandemic average of around 22.5 per cent. Economist Pat Bustamante reckons the share will hit 28 per cent by the end of next year.
“The increase in new public spending as a share of the real economy is unprecedented in speed and scale,” he said. BLOOMBERG
