Australia’s central bank keeps rates on hold, stays hawkish

SYDNEY (Reuters) -Australia’s central bank on Tuesday held interest rates steady as expected and reiterated that policy needed to stay tight, sticking to its guns a week after the Federal Reserve started its easing campaign with a bang.

The hawkish stance sent the Australian dollar 0.4% higher to $0.6864, the highest this year, and markets pared the chance of a December rate cut to 59% from 64% before the decision.

Wrapping up its September policy meeting, the Reserve Bank of Australia (RBA) kept rates at a 12-year high of 4.35% and said policy would have to be sufficiently restrictive to ensure inflation returned to target.

“While headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high,” the board said in a statement largely similar to the one in August.

“Data since then have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out.”

Markets had wagered heavily on a steady outcome given underlying inflation remained sticky and the labour market held up surprisingly well.

The RBA has kept rates steady since November, judging that the cash rate of 4.35% – up from a record-low 0.1% during the pandemic – is restrictive enough to bring inflation to its target band of 2-3% while preserving employment gains.

With underlying inflation stubborn at 3.9% last quarter and the labour market churning out lots of new jobs, there appears to be no urgency to ease policy like what the Federal Reserve did last week, cutting by 50 basis points to preempt sharp job losses.

Governor Michele Bullock has used every opportunity recently to stress that the central bank does not expect a near-term rate cut. That has prompted the markets to gradually price out the chance of a rate cut this year, with the first easing in December priced just at 64%.

Now, investors are waiting for the monthly inflation data for August on Wednesday. Headline inflation is likely to have slowed to an annual rate of 2.7% thanks to the government’s electricity rebates, but the core gauge could once again highlight sticky prices.

The RBA already trails other central bank in cutting rates, and the political pressure is ramping up for an easing. The left-wing Greens on Monday demanded the government to engineer a cut in interest rates in exchange for their support in parliament to pass the long-delayed reforms to the RBA.