FX.co ★ RBA Holds Key Rate At 12-Year High; Vigilant On Inflation

The Reserve Bank of Australia (RBA) opted to maintain its benchmark interest rate at a 12-year high for the fifth consecutive meeting, highlighting that inflation is decelerating more sluggishly than expected. This decision leaves room for a potential rate increase in the future. Under the leadership of Governor Michele Bullock, the RBA's policy board kept the cash rate target steady at 4.35 percent.

Additionally, the interest rate on Exchange Settlement balances was unchanged at 4.25 percent.

The last adjustment to the policy rate occurred in November 2023, when it was raised by a quarter-point to its current level.

While inflation is decreasing, its pace is slower than anticipated, and it remains elevated. Policymakers emphasized the importance of remaining alert to inflationary risks.

"The trajectory of interest rates that will most effectively ensure that inflation returns to the target within a reasonable timeframe remains uncertain, and the Board is not dismissing any possibilities," stated the RBA.

The board noted that economic activity lacks momentum, and the outlook is uncertain. Rising unemployment and slower-than-expected wage growth add to this uncertain economic landscape. Marcel Thieliant, an economist at Capital Economics, mentioned that the RBA discussed another rate hike, and a higher-than-anticipated second-quarter inflation could prompt action at the August meeting.

However, with easing capacity constraints and government rebates likely pushing inflation into the target range by the third quarter, the next adjustment could be a rate cut rather than an increase, possibly occurring early next year, Thieliant added.