Crazy Hold Expected Amid Sticky Inflation and Strong Jobs By Investing.com

Investing.com– The Reserve Bank of Australia is widely expected to keep interest rates unchanged in September, although sticky inflation and a strong labor market are likely to prompt a dovish outlook from the central bank.

The RBA is expected to remain unchanged at 4.35%, a Reuters poll showed.

But the central bank is likely to signal that interest rates will remain high for longer or may even rise further after inflation remained high in the second quarter.

While inflation has fallen steadily in recent months, it has done so at a slightly slower pace than the RBA forecast. Core inflation also remained well above the RBA’s annual target range of 2% to 3%.

Members of the RBA’s rate-setting board have considered rate hikes for at least the past two meetings, with policymakers worried about several potential risks to rising inflation.

Governor Michele Bullock has also warned repeatedly this year that sticky inflation could prompt more rate hikes from the central bank.

While goods prices eased, service price inflation remained sticky, especially against a strong labor market. Service price inflation has also been a main point of contention for the RBA.

Australia broadly defied a slowdown in economic activity, with monthly job growth beating expectations for the past five months.

While the RBA is still expected to lack sufficient momentum to raise rates, it is likely to keep rates higher for longer and delay any potential plans to start cutting rates.

“We continue to expect the RBA to begin the easing cycle in February 2025. But risks appear to have tilted towards a later rather than earlier start, particularly given the current momentum in the labor market,” ANZ analysts wrote in -a recent note. .

ANZ expects RBA members to consider a hike during its September meeting but ultimately settle on a hold.

The RBA’s dovish outlook contrasts with other major global central banks, which have mostly started cutting interest rates amid cooling inflation and a softer economic outlook.

Most notably, the Federal Reserve last week cut interest rates by 50 basis points and signaled the start of an easing cycle that is expected to cut rates substantially.

How will the ASX 200 react?

Australian shares benefited greatly from dovish signals from the Fed as the prospect of lower interest rates sent investors into economically sensitive sectors. This brought it to record highs last week.

But local shares remained vulnerable to profit-taking, with overly dovish signals from the RBA likely to trigger a short-term pullback in markets.

Australia’s economy has also cooled rapidly over the past year amid pressure from high rates, with the prospect of higher rates for longer presenting a weaker environment for local stocks.

How will AUDUSD react?

The Aussie dollar has benefited from a dovish RBA and accommodative Fed, with the pair recently hitting a near nine-month high.

Any louder signals from the RBA are likely to boost the currency further.