RBA Expected to Keep Interest Rates Unchanged in September

The Reserve Bank of Australia (RBA) is widely expected to maintain the cash target rate at 4.35% in September. However, persistent inflation and a robust labor market could lead to a more hawkish outlook from the central bank.

Current Economic Indicators

A recent Reuters poll suggests that while the RBA is likely to hold rates steady, it may indicate that interest rates will remain elevated for an extended period or potentially increase further due to high inflation noted in the second quarter.

Although the consumer price index inflation has been declining, the pace has been slower than the RBA’s forecasts. Core inflation remains significantly above the 2% to 3% annual target range, prompting concerns from board members about upside risks for inflation during recent meetings.

RBA Governor Michele Bullock has frequently warned of the implications of persistent inflation and its potential to motivate more rate hikes. Despite a reduction in goods prices, service price inflation has remained high, influenced by a strong labor market.

Labor Market Resilience

Australia’s labor market has continued to outperform expectations, with job growth exceeding forecasts for five consecutive months. While the RBA is not expected to raise rates at this meeting, it may choose to keep them elevated for an extended period, delaying any plans for cuts.

ANZ analysts suggest that the RBA might begin its easing cycle by February 2025, but the momentum within the labor market appears to lean towards a later timeline for rate cuts.

Comparison with Global Central Banks

Contrasting the RBA’s hawkish stance, many global central banks have begun to lower interest rates due to easing inflation and a softer economic outlook. Recently, the Federal Reserve cut rates by 50 basis points, signaling the beginning of an easing cycle.

Market Reactions

ASX 200 Outlook

Australian stocks have surged owing to dovish indicators from the Fed, lifting the ASX 200 to record highs. However, local stocks may face profit-taking due to the RBA’s potentially hawkish signals, leading to short-term pullbacks. The economy has also cooled in the past year under high rate pressures, raising concerns about the impact of sustained high rates on market performance.

AUDUSD Impact

The Australian dollar has gained from the RBA’s hawkish stance paired with the Fed’s dovish signals, with the AUDUSD recently reaching a near nine-month high. Further hawkish indications from the RBA may strengthen the currency even more.