RBA keeps interest rates on hold, flags restrictive policy on sticky inflation

Investing.com-- The Reserve Bank of Australia kept interest rates steady on Tuesday, as expected, and said that it will need to keep monetary conditions tight to combat persistent inflationary pressures. 

The RBA kept its official cash rate unchanged at 4.35%, leaving the rate unchanged for a six consecutive meeting. 

The RBA’s hold was widely anticipated after consumer price index was seen growing within the central bank’s forecasts in the second quarter. Underlying inflation also eased slightly, fostering some confidence that inflation will eventually cool. 

Still, CPI inflation remained well above the RBA’s 2% to 3% annual target- which spurred the central bank’s hawkish tone on Tuesday. 

“Inflation in underlying terms remains too high, and the latest projections show that it will be some time yet before inflation is sustainably in the target range. Data have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out,” the RBA said in a statement. 

But the central bank still did not explicitly mention the possibility of higher rates in its statement. 

Australian inflation rose in the second quarter even as high interest rates pressured overall business activity and spending. But the country’s labor market remained strong, in turn keeping consumer inflation resilient. 

The RBA expects inflation to only fall within its target range by mid-to-late 2025, and to reach the midpoint of its target range by 2026. 

Analysts expect sticky inflation to delay any plans by the RBA to cut interest rates, and that it is likely to keep rates high for longer. Analysts at ANZ said they only expect a rate cut by early-2025, and that they did not expect the RBA to hike rates any further.

The Australian dollar firmed slightly after the RBA’s hawkish tone, with the AUDUSD pair rising 0.2%. 

Australian stocks remained relatively muted after clocking steep losses in recent sessions. The ASX 200 rose 0.4%, lagged a bigger recovery in its Asian peers.