The Reserve Bank of Australia (RBA) has decided to hold its cash rate target steady at 4.35% today, reinforcing its hawkish position on inflation amidst economic uncertainties. This decision was largely anticipated by market participants, as highlighted in the Babypips.com Event Guide.
Key Points from the RBA Statement:
- Inflation continues to exceed target levels and is proving persistent.
- Current projections indicate inflation may not sustainably return to target until 2026.
- GDP data for the June quarter reflects weak growth.
- Labour market conditions remain tight, although there are signs of gradual easing.
- The Board is dedicated to returning inflation to target.
In its statement, the RBA noted, “Inflation remains above target and is proving persistent.” Although inflation has fallen significantly since its peak in 2022, it remains “some way above the midpoint of the 2–3 percent target range,” with the trimmed mean measure of underlying inflation at 3.9% for the year ending in the June quarter.
The central bank also addressed ongoing economic uncertainties, including the delayed effects of monetary policy, pricing decisions by firms, wage responses, and geopolitical factors. Nonetheless, the RBA asserted that its current policy stance is “restrictive and working broadly as anticipated.”
In a subsequent press conference, RBA Governor Michele Bullock reiterated the Board’s commitment to controlling inflation: “Sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority, consistent with the RBA’s mandate for price stability and full employment.”
She acknowledged the uncertain economic outlook and the challenge of achieving disinflation without risking a recession, indicating that the RBA is prepared to adjust its policy as needed.
Market Reactions
The initial response to the RBA’s decision was a strengthening of the Australian dollar against major currencies. This “buy the fact” reaction likely stemmed from the market’s view that the RBA’s ongoing focus on inflation and its hesitance to signal any near-term easing was somewhat more hawkish than expected.
However, selling pressure emerged during the press conference, likely due to a mix of profit-taking, RBA Governor’s negative comments on productivity concerns and subdued GDP growth, and the indication that interest rate hikes were not on the agenda for this month.
Despite this dip, buyers quickly returned as the London session opened, driven by fundamental investors who believe the likelihood of rate cuts remains low for now, along with a relatively favorable interest rate differential outlook for the Aussie.
Additionally, new stimulative measures from the People’s Bank of China supported a broad risk-on sentiment, which may have further contributed to the Australian dollar’s strength.
