RBA interest rates: Central bank holds the line in fight against inflation with yet another pause on rates

The Reserve Bank has defied political pressure to slash interest rates and once again warned Australian borrowers they could be waiting until next year for relief.

The RBA held the country’s key interest rate steady at 4.35 per cent on Tuesday, where it has remained since November 2023 after 13 hikes.

Governor Michele Bullock also predicted rates would probably not go down in the near future — only once the bank is confident inflation has been crushed.

But in a subtle yet welcome shift in tone compared to August, Ms Bullock revealed the RBA had not considered lifting rates at this meeting.

“We think we’re in the right spot at the moment,” Ms Bullock, pictured, told reporters.

Her bank held firm despite a series of political attacks in the past month and a supersized cut in the United States last week.

“We need to focus . . . on what we think is best for the Australian economy,” Ms Bullock said.

“(Inflation) is the challenge for the Australian public. That’s why people are hurting.”

That “challenge” is expected to remain until 2026, according to the bank’s latest inflation forecasts.

It adds fuel to the fire in Canberra where the upcoming Federal Election is set to be fought on cost of living.

Shadow Treasurer Angus Taylor said Australia was at the back of the pack as interest rates were coming down across the world.

He said the supply side of the economy was “broken”, made worse by Government red tape and industrial relations changes.

“The result of that is we see persistent, stubborn inflation,” Mr Taylor said.

But Treasurer Jim Chalmers said the country has made “substantial progress” in the fight against rising prices.

“Interest rates haven’t gone up for the best part of the year and this reflects the progress that we’ve made when it comes to getting inflation down,” he said.

Dr Chalmers pointed to budget surpluses and relief for households on energy and childcare to claim the Government was “helping not hurting”.

Economists anticipate that relief will ease pressure on wallets for a while but the RBA has clearly signalled it will ignore the temporary effect when making rate calls.

The exact impact will become clearer on Wednesday when the Australian Bureau of Statistics releases fresh data.

EY chief economist Cherelle Murphy said the RBA had clearly recognised that “temporary government cost-of-living relief alone is not enough to push inflation down, and keep it down”.

Ms Murphy said the tight jobs market and poor growth in productivity — a measure of how effective workers and businesses are — added to risks underlying inflation would be too high.

But she also called on splurging Governments to get their houses in order.

Cash splashes have been so huge that experts have declared Government spending is close to a record share of the economy, and sucking workers away from private businesses.

“The pace of government spending needs to be contained across both the Commonwealth and States to give the economy the best chance at finding a balance where there is no more upward pressure on inflation,” she said.

“Spending by governments is currently adding stimulus at a time when the economy is capacity constrained — meaning the journey to lower rates is slower than it needs to be.”

Key in Ms Bullock’s thinking has been that higher interest rates were helping to fix the imbalance, regardless of the cause.

“The level of demand is still above the economy’s ability to supply goods and services, but that gap is closing,” she said.

In particular focus were services — rent, schools and insurance are examples — which need more workers and can’t be easily bought from overseas like cars or clothes. That makes these price rises harder to stop.

Inflation for services ran at 4.5 per cent in the year to June, well above the RBA’s 2 to 3 per cent target band.

It’s tightrope for the central bank, however.

Inflation has been stuck above the target zone and unemployment is still believed to be below a sustainable level which would help keep rising prices under control.

Yet economic activity has slowed and is close to the softest pace in decades.

The RBA is keeping an eye on movement in the jobs market, and highlighted plenty of potential threats on the horizon.

Those risks included softer growth in China, a slow recovery of household spending, and a lagged impact from the bank’s 13 earlier hikes.

Nonetheless, a series of financial experts reckon punters will need to be patient as they wait for relief.

Deutsche Bank chief economist Phil O’Donaghoe expects a rate cut won’t come until the June quarter next year.

Mr O’Donaghoe said a hike couldn’t be ruled out either.

“The RBA’s policy rate is a heavy hammer, not a surgical scalpel . . . that makes the ‘narrow path’ strategy a risky one,” he said.

UBS and AMP both predicted a cut in February, with AMP chief economist Shane Oliver saying the RBA was still more focused on high inflation than rising unemployment.

But Mr Oliver said the RBA should move to cut rates more quickly to avoid the jobless rate lifting.

Moody’s Analytics economist Harry Murphy Cruise said the RBA had “played a straight bat”.

“The board emphasised the oodles of downside risk facing the economy, while in the same breath reiterating the need to stay vigilant to the dangers of higher inflation,” he said

“All in all, the RBA’s sentiment was largely unchanged from last month; there’s more work to be done to lower inflation and rate cuts this side of Christmas are unlikely.”

A Bloomberg survey of economists released Monday found that most expected rates to stay unchanged for the rest of the year.

Yet traders have ignored the sentiment and are reportedly betting rates will go down at least once before December.