Australia central bank holds rates steady, keeps hike on table

The Reserve Bank of Australia (RBA) decided on Tuesday to keep its cash rate steady at 4.35 per cent, marking the second consecutive meeting with no change. The central bank acknowledged that the economy is slowing, as expected, but cautioned that it could raise rates again if necessary to curb inflation. The RBA pledged to take necessary measures to bring inflation back within its target range of 2 per cent to 3 per cent, even if that means increasing the cash rate further.

Policymakers stressed the importance of keeping high inflation from becoming entrenched and emphasized the need for subdued growth in aggregate demand to reduce capacity pressures. While the board remained focused on maintaining price stability, it has not ruled out additional policy tightening. The decision followed a surprise drop in second-quarter inflation data, which fell below the RBA's forecast but remained within the target band.

The Australian dollar remained relatively stable, and government bond yields also showed little movement. The RBA's decision was largely in line with expectations, with the odds of another rate hike this year now estimated at around 40 per cent, down from 50 per cent before the meeting. Despite the central bank's efforts, a record housing boom has come to an abrupt end, with falling auction clearance rates, lower loan applications, and a decline in sales reflecting challenging market conditions.

Nonetheless, consumer spending remained robust, the labor market continued to add jobs, and the recent escalation of Middle East tensions kept policymakers on high alert for potential impacts from higher oil prices. Inflation, which spiked at 3.9 per cent in the second quarter, is expected to fall to 3.6 per cent by year-end and 2.6 per cent by the end of 2027.