Australia’s central bank keeps rates on hold, remains flat By Reuters

SYDNEY (Reuters) – Australia’s central bank kept interest rates steady on Tuesday as expected and reiterated that policy must remain tight, sticking to its guns a week after the Federal Reserve began its easing campaign with explosion.

The dovish stance sent the Australian dollar up 0.4% to $0.6864, its highest this year, and markets cut the chance of a rate cut in December to 59% from 64% before the decision.

At the end of its September policy meeting, the Reserve Bank of Australia (RBA) kept interest rates at a 12-year high of 4.35% and said policy should be tight enough to ensure a return to target of inflation.

“While headline inflation will ease for a while, core inflation is more indicative of inflationary momentum and remains too high,” the board said in a largely similar statement to August.

“Data since then has reinforced the need to remain vigilant to rising inflation risks, and the Board is not ruling anything out in or out of it.”

Markets were betting heavily on a stable outcome as core inflation remained sticky and the labor market held up surprisingly well.

The RBA has kept rates steady since November, believing the cash rate of 4.35% – up from a record low of 0.1% during the pandemic – is tight enough to bring inflation to its target range of 2-3 % while maintaining occupancy gains.

With core inflation stubbornly at 3.9% in the last quarter and the labor market generating plenty of new jobs, there appears to be no urgency to ease policy as the Federal Reserve did last week by cutting 50 basis points basis to prevent heavy job losses.

Governor Michele Bullock recently took every opportunity to emphasize that the central bank does not expect a rate cut in the near term. That has led markets to gradually price in the chance of a rate cut this year, with the first easing in December priced at just 64%.

Investors now await monthly inflation data for August on Wednesday. Headline inflation is likely to have eased to an annual rate of 2.7% due to government electricity cuts, but the underlying indicator could once again highlight stuck prices.

The RBA is already lagging behind other central banks in cutting interest rates, and political pressure is mounting for an easing. The left-leaning Greens on Monday called on the government to stage an interest rate cut in exchange for their support in parliament to pass long-delayed reforms to the RBA.