By James Glynn
SYDNEY–The Reserve Bank of Australia left its official cash rate unchanged for the third month in a row on Tuesday, but remained cautious about the outlook, saying that further interest-rate increases remain a possibility as inflation remains too high.
The official cash rate was left at 4.1%, as widely expected by economists. The RBA has been on hold since July, with many economists saying now that the tightening cycle, which unleashed 400 basis points of increases in just over a year, is at an end.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks,” the RBA said in a statement.
The risk for the RBA in remaining on hold is that interest rates in Australia are well below the level seen in many other major economies.
Currency traders have warned that the yawning differential could put downward pressure on the Australian dollar over time and fan inflation through higher import prices.
The policy meeting is Gov. Philip Lowe’s last. He will be replaced by his current deputy, Michele Bullock, on Sept. 18.
Recent data has pointed to faster-than-expected cooling of inflation and some evidence that unemployment has started to rise. Wages growth has remained largely benign while consumers are clearly reducing spending in response to rising living costs.
“Inflation in Australia has passed its peak and the monthly CPI indicator for July showed a further decline. But inflation is still too high and will remain so for some time yet,” the RBA said.
The slowdown in consumer inflation has come amid growing concern about China, which buys vast amounts of raw materials from mines dotting Australia.
Household budgets are also straining to cope with the rapid rise in mortgage interest rates since last year.
Over a million homes are experiencing a massive jump in home-loan repayments as ultralow fixed mortgage interest rates convert to sharply increased variable rates.
The migration from low to high interest rates is now at full throttle, with the RBA watching closely the impact on household finances and confidence.
Gross domestic product data on Wednesday is expected to show that the commodity-rich economy continued to grow sluggishly through the second quarter, with a sustained period of weak growth anticipated over the next year.
“The outlook for household consumption remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income,” the RBA said.
“Globally, there is increased uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market,” it added.
Write to James Glynn at [email protected]
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