Hopes of a rate cut in February are fading after the central bank warned the Australian economy is still too hot.
Interest rates have been left unchanged and the Reserve Bank of Australia remains steadfast in its fight against inflation, even after lowering its expectations for the economy.
On Tuesday, the bank kept the cash rate at 4.35 percent for the twelfth month in a row after its board meeting, a move that was widely expected.
Some economists had expected a more pronounced change in tone to reflect recent progress on inflation and the bank’s updated forecasts.
ANZ head of Australian economics Adam Boyton said the all-important closing paragraph in the post-meeting statement was largely unchanged, with the central bank still “not ruling anything in or out” on its next decision.
“While headline inflation has fallen substantially and will remain lower for some time, underlying inflation is more indicative of inflation momentum and remains too high,” the RBA board said in the statement.
Mr Boyton expected “more of a move towards neutral”, especially as the accompanying November statement on monetary policy contained lower forecasts for underlying inflation, wages and economic growth.
“While most of these are small changes, the predictions appear to have moved in a more neutral direction than the rhetoric,” he said.
On Tuesday, the Reserve Bank of Australia (pictured) kept the cash rate at 4.35 percent for the twelfth month in a row after its board meeting.
Predictions from the big four banks for a rate cut in February became even “scarier”, National Australia Bank analysts said.
NAB economist Taylor Nugent said the central bank has a high bar to clear before cutting rates.
“That’s an environment where the risk is clearly moving to a later onset than the NAB forecast in February,” he said.
The RBA would need to see unemployment rise noticeably in the next three employment updates before the February meeting for the NAB forecast to become reality.
In its monetary policy statement, the RBA revised down its peak unemployment forecast from 4.4 percent to 4.5 percent.
Australia’s unemployment rate has remained relatively low despite the recent influx of migration, which has been “remarkable”, Finance Minister Steven Kennedy said.
“It’s easing now, but other countries, I mentioned a few – Canada and New Zealand – saw this, and their labor market outcomes are not nearly as good,” he said at a Senate estimates hearing on Wednesday.
‘To see how these people enter the supply through employment and how the overall percentage remains low is fantastic and an excellent result.’
Treasurer Jim Chalmers said it has been more than a year since interest rates have risen, reflecting the government’s work to slow inflation.
The RBA’s updated forecasts also showed “welcome and encouraging progress in the fight against inflation”.
“What this shows is that we have been able to fight inflation without ignoring the risks to growth and without sacrificing the gains we have made in the labor market,” Mr Chalmers told parliament.
Finance Minister Steven Kennedy said at a Senate Budget at Parliament House in Canberra on Wednesday (pictured) that unemployment remained relatively low
But Shadow Treasurer Angus Taylor said Australia was lagging behind peer countries as increased spending created an imbalance between supply and demand.
“Everyone is being helped by lower inflation and lower interest rates and what we heard from the Reserve Bank yesterday is that interest rates are going to stay higher for longer,” he told ABC Radio.
Kennedy said government spending has been a strong contributor to demand in the economy over the past year.
“We’ve been particularly interested in the infrastructure market for a while now, and the size of the pipeline and the costs there,” he says.
Mr Kennedy said there are mixed views on the impact infrastructure projects have on the workforce available for housing construction.
“We would all like to see more economic activity that infrastructure enables, but this must be done in a reasonable and proportionate way.”