RBA Set to Hold Key Rate to Tackle Sticky Prices, Global Risks

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(Bloomberg) — Australia’s central bank is poised to keep interest rates at a 13-year high, marking a year of unchanged policy as it grapples with a slow pace of disinflation and mounting global risks capped by a tight US election. 

Economists see the Reserve Bank holding the cash rate at 4.35% on Tuesday — and leaving it there until at least February — with the board’s statement expected to remain cautiously hawkish. It’s likely to highlight the need for restrictive policy given an accompanying update of economic forecasts is set to show core consumer prices staying stubbornly elevated.

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The confluence of trends has seen a convergence of trends: a strong labor market, persistently high inflation and a deteriorating global economy. Political conditions were at a premium as North Korean troops joined Russia’s war against Ukraine with Israel and Iran firing missiles at each other. Markets are already pricing in Donald Trump’s return as president – an outcome that could lead to further trade unrest.

“Globally, there is more uncertainty than usual and coupled with domestic data, it argues against caution and patience from the RBA,” said Su-Lin Ong, economist at Royal Bank of Canada. “High on the list of uncertainties will be the US election – the president and the composition of Congress.”

Financial markets are looking at volatility in the US presidential election. Traders are weighing the impact of a controversial outcome or renewed trade war with China. Beijing last month unveiled aggressive measures to underpin growth that has been lacking in recent times.

Economists said they would be interested in any discussions about China’s economy in the RBA’s comments. China buys about a third of Australia’s exports and has a major impact on the country’s economic performance.

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Treasurer Jim Chalmers last month hailed China’s new energy recovery effort as a “really welcome development” for his nation and the world at large. Chalmers cited weak demand in China as one of the factors that has been troubling his country’s economy.

Despite Australia’s anemic growth, the RBA is not ready to cut rates yet as Governor Michele Bullock reiterated that inflation needs to move “steadily” within its 2-3% target. As a result, retailers have postponed their reduction rates until May 2025, from February earlier.

Even as the rate cut begins, most economists expect the RBA to conduct a shallow easing cycle, which would see its cash rate rise to 1 percent below the Federal Reserve. The US central bank will meet a day after the RBA and Bloomberg Economics predicted another 25 basis point cut.

“The decision could have an impact on the October payrolls and the presidential election, which will both come before then,” wrote economists Chris Collins and Anna Wong. “Surprisingly weak payments or uncertainty about the outcome of the election could cause market turmoil.”

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Unlike the Fed, the RBA does not issue a spot on rates but will publish revised quarterly economic forecasts that accompany its decision. Economists do not expect major changes in the CPI outlook. The central bank’s revision in August showed reduced inflation, the main measure of prices, rising to 2.9% in December 2025 and to 2.6% in late 2026 from 3.5% in the previous quarter.

The RBA is focusing on underlying inflation as government spending pressures the headline figure.

“We see no reason for the RBA to change its message that it does not control anything internally, or externally,” said Josh Williamson, an economist at Citigroup Inc. “So, the hawkish bias should continue.”

If Australia’s labor market remains strong, Williamson said, the RBA will likely delay a rate cut in May. “Risks are now headed for higher territory and a delayed rate cut cycle.”

Australia is also due to hold elections in May 2025.

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