Australia’s central bank holds rates as expected, waters down tightening bias

SYDNEY: Australia’s central bank held interest rates steady on Tuesday and watered down its tightening bias, signalling greater confidence that inflation is moving back to its target as the economy slows.

Wrapping up its two-day March policy meeting, the Reserve Bank of Australia (RBA) kept rates at a 12-year high of 4.35% for a third straight meeting, and said it was not ruling anything in or out on policy.

Markets had wagered heavily on a steady outcome given inflation has held at two-year lows and economic growth slowed to a crawl.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out,” said the RBA Board in a statement.

That compared with the previous phrasing that “a further increase in interest rates cannot be ruled out”.

The Australian dollar eased 0.3% to $0.6542. Three-year bond yields fell 5 basis points to 3.705% and markets are now pricing in a total easing of 43 basis points this year, up from 37 bps before the RBA statement.

“We expect the RBA to remove the last remnants of its tightening bias at the June board meeting, before cutting rates by 25bp in August before a second cut in November, which will see the cash rate end the year at 3.85%,” said Tony Sycamore, an analyst at IG.

Data over the past six weeks suggests the previous policy tightening - with the benchmark rate up 425 basis points since May 2022 - is working well to constrain demand.

Australian dollar slips as RBA softens policy bias

Inflation held at a two-year low of 3.4% in January, the economy grew by a tepid 0.2% last quarter as household consumption flatlined and the jobless rate crept up to 4.1%, faster than the central bank had forecast.

The RBA targets an inflation rate of between 2 and 3%. Even though domestic data have largely been on the soft side, markets have scaled back bets for the RBA easing this year, thanks to a shift in expectations for US rates due to sticky inflation there. The timing for the first Federal Reserve rate cut has now been pushed out to June, and maybe even July.

Also on Tuesday, the Bank of Japan ended eight years of negative interest rates and other remnants of its unorthodox monetary policy, a historic shift away from decades of massive monetary stimulus.