On Friday, Australia’s top central banker issued a warning, emphasizing that there was still a long way to go to meet the midpoint of the 2-3% inflation target range. Additionally, the bank has not ruled out another interest rate hike.
The threat of another rate hike has prompted UBS and Capital Economics to delay the likely timing of the first rate cut. However, economists do not expect the Reserve Bank of Australia to follow through on its tightening bias.
RBA Governor Michele Bullock told lawmakers that Australia’s inflation challenge is far from over, despite encouraging signs of moderation. Earlier this week, the central bank held its policy meeting and left interest rates unchanged.
“An inflation rate with a ‘4’ in front of it is not good enough and is still some way from the midpoint of our target,” said Bullock, noting that services inflation still needs to come “quite a bit lower”.
“There is no good to get back in (the band) and then pop out again. We’ve got to be convinced that we’re back in the band around about the midpoint.”
Even though the central bank has retained the option of raising interest rates again, markets are skeptical about their willingness to tighten. However, the markets have hinted at the likely timing of the first cut.
The change in a move in May has dropped to 20%, from 50% early last week. And September is the most likely month for the first rate reduction.
Bullock noted on Friday that the central bank’s forecasts for 2026 remained highly uncertain. In the fourth quarter, inflation is anticipated to decrease to a two-year low of 4.1%. Subsequently, it is projected to reach the bank’s target range of 2-3% in late 2025 and stabilize at 2.5% in 2026.
“Even if the economy evolves along the central path, inflation will still have been outside the target range for four years,” Bullock said.
Bullock’s hawkish tilt has led UBS to forecast the RBA’s first rate cut in November. This shift is a result of pushback from global central bankers on market expectations of early rate cuts this year, rather than August.
Capital Economics has also pushed back their forecast for the first rate cut to August from May.
Across the Tasman, the odds of another hike from the Reserve Bank of New Zealand are decreasing. On Friday, ANZ called for two more rate hikes in February and April, contributing to the shift in expectations.
The next policy meeting is scheduled for February 28, and markets now expect a 38% chance of a hike, compared to almost no chance a week ago.
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