Reserve Bank interest rates: RBA signals rate cut still some time away

The Reserve Bank has signalled that an interest rate cut appears still months away, describing the prospect of a reduction in the short term as “unlikely”.

According to the minutes of its last board meeting two weeks ago, the bank considered a rate rise but decided “the case to leave cash rate target unchanged at this meeting was the stronger one”.

However, board members also agreed that “based on the information available at the time of the meeting, it was unlikely that the cash rate target would be reduced in the short term”.

They also held out the prospect of the cash rate remaining at 4.35 per cent for some time if it was determined inflation was falling back to within the RBA’s target range of 2-3 per cent.

“Holding the cash rate steady at this meeting — and possibly for an extended period — would be appropriate if members assessed that inflation was still broadly on track to return to target within a reasonable time frame,” the minutes said.

“It could also be appropriate if the current level of the cash rate was judged to be appropriate to balance the prevailing risks to inflation with those surrounding the outlook for the labour market.”

The RBA noted “several developments”, including ongoing cost pressures, suggested a “materially” higher risk that inflation would not return to the target band by late 2025.

“Given members’ agreed commitment to prioritise returning inflation to target, these observations could justify an immediate increase in the cash rate,” it said.

However, “the case to hold the cash rate steady ... was further supported by the need to balance the risks to the inflation forecast with those surrounding the outlook for full employment”.

Also, there was uncertainty around the forecast pick-up in domestic demand.

“Given this, and the high degree of uncertainty surrounding both the forecasts and the implications of the volatility in financial markets prevailing at the time of the meeting, it could be that holding the cash rate steady best balanced the risks surrounding the outlook for both inflation and the labour market.”

ANZ Research said those comments and “an increased number of references to ‘uncertainty’ in the minutes, suggests to us that it would take a shock (either in the form of external or significant surprises on the domestic data) to move the cash rate in either direction ... over the next few months”.

In addition, it noted that while the RBA “has been at pains to argue it is too soon to contemplate rate cuts”, the minutes implied “that inflation does not need to be at the target before the board decides to ease policy, rather it needs to be moving sustainably towards the target range”.