Australia’s central bank keeps rates steady at 3.85%, stuns markets

[SYDNEY] Australia’s central bank on Tuesday (Jul 8) left its cash rate steady at 3.85 per cent, a shock for markets that had confidently wagered on a cut, saying the majority of the board wanted to wait for more information to confirm inflation was slowing.

Traders were quick to send the Australian dollar racing up 0.8 per cent to US$0.6545, while three-year bond futures extended earlier losses and fell 13 ticks to 96.58.

The swift moves in markets imply around an 85 per cent chance the cash rate would be cut to 3.6 per cent at its Aug 12 meeting, and now favours rates bottoming at 3.1 per cent rather than 2.85 per cent.

Wrapping up a two-day policy meeting, the Reserve Bank of Australia (RBA) said it remained cautious about the inflation outlook, adding that six members had voted to hold rates steady while three voted against, a rare split decision for the board.

Markets had been almost fully priced for an easing to 3.60 per cent this week given core inflation had slowed to the mid-point of the RBA’s 2 to 3 per cent target range and consumer spending was proving weaker than expected.

“The Board judged that it could wait for a little more information to confirm that inflation remains on track to reach 2.5 per cent on a sustainable basis,” the board said.

“It noted that monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia.”

On Monday, US President Donald Trump ramped up his global trade war, telling trade partners such as Japan and South Korea that higher US tariffs would start on Aug 1, although there appeared to be opportunities for additional negotiations.

Australia treasurer Jim Chalmers said the RBA decision to hold rates was not the result millions of Australians were hoping for or what the market was expecting.

“We have made substantial and sustained progress on inflation which is why interest rates have already been cut twice in five months this year,” Chalmers said.

Harry Murphy Cruise, head of economic research at Oxford Economics in Australia, said the global uncertainty and the “good” inflation news warranted a rate cut at Tuesday’s meeting.

“Yes, the domestic economy has pockets of strength and unemployment is low, but we’d rather see momentum build in the economy ahead of a potential storm than risk being caught flat-footed if conditions sour.”

Rates outlook less dovish?

The central bank cut interest rates in February and May, but the reductions did little to spur consumers into spending even as they lifted housing prices to record highs.

The stubbornly frugal consumer is a reason that the economy barely grew in the first quarter and a slew of soft retail sales reports suggests households are saving rather than spending past tax cuts.

A monthly inflation report had the closely-watched trimmed mean measure hitting 2.4 per cent in May, a 3½ year low and coming under the midpoint of the target band of 2 to 3 per cent. That had prompted many economists to bring forward their rate cut call to July from August.

In its statement, the RBA said that while the monthly CPI indicators “suggest that June quarter inflation is likely to be broadly in line with the forecast, they were, at the margin, slightly stronger than expected”.

The labour market remained resilient, which argues against the RBA rushing into stimulatory policy settings. The unemployment rate has been hovering at 4.1 per cent for over a year now.

“The upshot is that barring a major upside surprise in the Q2 inflation data, we still expect a cut at the Bank’s next meeting in August,” said Marcel Thieliant, head of Asia-Pacific economics at Capital Economics.

“That said, the risks are now tilted towards less easing than the 100bps of cuts we are forecasting over the coming twelve months.” REUTERS