By Stella Qiu and Wayne Cole
SYDNEY, Dec 9 (Reuters) – Australia’s central bank on Tuesday left its cash rate steady as expected at 3.60%, saying risks to inflation had tilted to the upside and it would take a little longer to assess the persistence of price pressures.
Wrapping up the last policy meeting of the year, the Reserve Bank of Australia (RBA) also said domestic demand had been stronger than expected and could add to capacity pressures.
Markets had seen no chance of an easing this week after a run of hot data on inflation, economic growth and household spending.
The policy statement, however, wasn’t as hawkish as feared, with the Australian dollar largely steady at $0.6620. Three-year government bond yields came off earlier highs and were last up 1 basis point at 4.058%.
Swaps now fully assume the next move in interest rates will be up and possibly as soon as May, which is about 50% priced in. A total tightening of 38 basis points is expected next year.
“The recent data suggest the risks to inflation have tilted to the upside, but it will take a little longer to assess the persistence of inflationary pressures,” the board said in a statement.
“There are uncertainties about the outlook for domestic economic activity and inflation and the extent to which monetary policy remains restrictive.”
RBA IN NO RUSH TO HIKE
The RBA has cut interest rates three times this year but inflation is rearing its head again, having climbed for four straight months to 3.8% in October. The trimmed mean measure of core inflation ran at 3.3%, above the mid-point of the target band of 2%-3%.
The board said there is uncertainty about how much of a signal the new monthly CPI numbers provide.
“Nevertheless, the data do suggest some signs of a more broadly based pick-up in inflation, part of which may be persistent and will bear close monitoring,” the statement added.
Harry Murphy Cruise, head of economic research at Oxford Economics in Australia, ruled out any further rate cuts for next year, but added that “the board’s tone was calmer than expected.”
“Explaining away part of the inflation surge suggests the board is in no rush to hike,” he said.
Other analysts said the markets had been too eager to price in near-term policy tightening.
“This isn’t the statement of a central bank with one hand hovering on the rate hike button,” said Tony Sycamore, market analyst at IG in Sydney.
The economy, which could be running near its speed limit, grew at the fastest pace in two years last quarter, fuelled by spending by businesses, governments and consumers. The labour market also stayed resilient, with the jobless rate edging lower to 4.3% in October, from 4.5%.
The mood among consumers, long stuck in the doldrums, has turned positive in a boost to the outlook for household spending. Home prices surged to new record highs, home loan growth jumped and upbeat stock markets suggest that financial conditions might not be as restrictive as previously thought.
(Reporting by Stella Qiu and Wayne ColeEditing by Shri Navaratnam)
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