The Reserve Bank of Australia (RBA) warned yesterday it may need to deliver another cash rate increase to stave off stubbornly high inflation but market sentiment is leaning towards rate cuts in the near future, the Australian Financial Review reported.
In holding the cash rate steady at 4.35%, the RBA highlighted at its December 5 meeting that an additional rate increase may be necessary to take the pressure off high prices.
“Members agreed that whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend on how the incoming data alter the economic outlook and the evolving assessment of risks,” the minutes from the meeting showed.
December inflation data hold key
This stance is in contrast to the prevailing sentiment in the markets, which have pivoted towards predicting rate cuts from the RBA next year after the US Federal Reserve signalled an end to its tightening cycle last week.
Current market predictions suggest a 25% likelihood of a rate cut to 4.1% by the RBA’s second meeting on March 19, 2024, followed by a further reduction in June and potentially two cuts by year-end.
The upcoming December quarter inflation report, set for release on January 31, is critical in shaping the RBA's next move.
Demand-driven inflation
The RBA argued that a potential rate hike stems from inflation being driven by demand, posing a risk of exceeding the 2%-3% target until at least December 2025.
The current high interest rates are showing signs of cooling the economy, and there is a chance of a more significant increase in unemployment than expected.
“Members acknowledged that consumption growth had been quite weak, as many households are experiencing a painful squeeze on their finances, with inflation and higher interest rates weighing on real disposable incomes,” the minutes said.
Capital Economics analyst Abhijit Surya foresees a rate reduction by the RBA as early as May 2024, citing concerns over domestic economic health, while ANZ head of Australian economics Adam Boyton predicts that the first rate cut was unlikely until November 2024.
No bond sales for now
The RBA board also discussed its pandemic-era bond purchases but opted to maintain its current strategy of holding the bonds until maturity for now.
It will, however, keep the prospect of selling its bonds on the cards due to its exposure to interest rate risk and because of the “relatively gradual decline in the bank’s portfolio of bonds compared with some other advanced economy central banks”.