Central bank keeps policy unchanged
The Reserve Bank of Australia left interest rates unchanged at 4.35% on Tuesday, while signalling that it remains prepared to raise rates if needed to meet its goals of price stability and full employment.
The decision was unanimous and matched expectations from economists surveyed by Reuters. It comes as Australia continues to deal with inflation that remains above the central bank’s target range.
Inflation still above comfort levels
In its statement, the RBA said inflation was “still too high”. The central bank said keeping the cash rate unchanged would allow it to assess the effects of earlier rate increases and the impact of the disruption to oil supply.
The RBA’s inflation target is 2% to 3%. Although Australia’s April inflation reading eased to 4.2% year over year, it remained clearly above that range.
Markets react after the announcement
The Australian S&P ASX/200 moved slightly lower after the decision. The Australian dollar also weakened, falling 0.3% against the U.S. dollar to trade at 0.705.
Oil disruption remains a concern
Although the United States and Iran have reached an agreement to end the Iran war, the RBA said the resolution remains at an early stage. The central bank warned that global oil supply problems may take time to ease.
That means energy costs could stay elevated, keeping pressure on inflation in the months ahead.
Growth data disappoints
Earlier this month, Australia reported that gross domestic product expanded 2.5% year over year in the first quarter. That missed expectations and matched the growth rate recorded in the previous quarter.
On a quarterly basis, GDP rose 0.3%, below the 0.5% forecast in a Reuters poll. Growth also slowed from the 0.9% quarterly expansion seen in the prior quarter.
RBA warns uncertainty could weigh on growth
The central bank said a long period of uncertainty could weaken economic activity in Australia and among the country’s major trading partners.
“A period of prolonged uncertainty may also cause growth to be lower in Australia’s major trading partners and in Australia,” the RBA said.
Fuel costs may spread through the economy
The RBA said higher fuel prices are already adding directly to inflation. It also warned there are signs that those costs are feeding into the prices of other goods and services.
“Higher fuel prices have added directly to inflation and there are indications that this is passing through to the prices of other goods and services, so inflation is likely to remain high for some time,” the RBA wrote.
Rate hike risk remains on the table
For now, the RBA is holding policy steady while it evaluates inflation, growth, energy prices and the delayed effects of previous rate increases. But with inflation still above target and fuel costs adding pressure, the central bank has kept the door open to further tightening.
