Reserve Bank stands pat in June

At its meeting on 17–18 June, the Reserve Bank of Australia (RBA) decided to keep the official cash rate (OCR) unchanged at 4.35%, meeting market expectations and marking the fifth consecutive hold. Moreover, the Bank left the interest rate on exchange settlement balances at 4.25%.

The decision to stand pat was primarily influenced by a slowing downward trend in inflation: Despite receding from their peak in December 2022, price pressures continue to exceed the upper bound of the RBA’s 2.0–3.0% target band through April. The Bank noted that while demand still outpaces supply in the economy, its tight policy stance has helped to narrow this gap. Moreover, the RBA highlighted elevated domestic cost pressures for both labor and non-labor inputs, as well as persistent upside risks to the inflationary outlook.

In its communiqué, the Bank restated its commitment to returning inflation to the target range but acknowledged that it will take time before inflation is brought sustainably within this range. In a subsequent statement, Governor Michele Bullock admitted that a potential hike had been discussed at the meeting, pointing to a hawkish stance. That said, Bullock noted that the likelihood of this scenario is not increasing and that the RBA has not ruled out cuts for 2024; future decisions will consider global economic trends, domestic demand and the labor market. Most of our panelists expect the OCR to be kept at its current level this year, while a minority have penciled in a cut for Q4. The Bank will convene next on 5–6 August.

Analysts at the United Overseas Bank commented: “While the RBA has left the potential for a further interest rate increase, our base case is for the central bank to be on hold for longer, rather than a near-term hike. This is because higher interest rates are clearly having a negative impact on the economy, with activity slowing and consumer spending remaining weak.” Nomura’s Andrew Ticehurst and David Seif expect the RBA to cut by year-end: “Our RBA views [for a 25 basis point cut in November] and strategy outlook are unchanged. The RBA is currently in a difficult place, having to balance still-high inflation against sub-trend growth. There is some chance it may need to ‘stare down’ one more high-ish quarterly CPI inflation report, for Q2 (due late July). However, it is also clear that policy is restrictive, and demand and supply are continuing to move into better balance, given sub-trend growth. The labour market is also showing signs of weakness, with hours worked soft and job vacancies declining.”

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