RBA Pauses Rate Hikes in December: First Cut Delayed to Q2 - Reuters
AInvestThursday, Dec 5, 2024 7:15 pm ET
4min read
RBA --


The Reserve Bank of Australia (RBA) has decided to hold interest rates steady in December, marking a pause in its rate hike cycle. This decision, according to a Reuters poll, pushes back the first rate cut to the second quarter (Q2) of 2025. The RBA's priority remains sustainably returning inflation to the target range, with underlying inflation currently at 3.5% over the year to the September quarter. This article delves into the reasons behind the RBA's decision and its implications for the Australian economy and investors.

The RBA's decision to pause rate hikes in December reflects its assessment of the current economic landscape. Despite a decline in headline inflation, underlying inflation remains high, indicating enduring inflationary pressures. The RBA notes that part of the decline in headline inflation reflects temporary cost of living relief, and it is not ruling out further rate hikes if necessary.



The RBA's forecast suggests that inflation will not return sustainably to the midpoint of the target until at least 2026. This indicates that the RBA is maintaining a cautious stance on inflation, despite the recent declines. The RBA's determination to achieve its inflation target is supported by the consistency of medium-term inflation expectations with the target. However, the RBA remains vigilant to upside risks to inflation, ensuring that policy remains sufficiently restrictive until the Board is confident that inflation will be sustainably in the target range.



The RBA's decision to pause rate hikes in December also reflects its assessment of the labor market. Despite some easing, labor market conditions remain tight, with strong employment growth, high participation rates, and elevated vacancies. This tight labor market contributes to wage pressures, which, in turn, impact underlying inflation. The RBA's latest forecast suggests that underlying inflation, as represented by the trimmed mean, was 3.5 percent over the year to the September quarter, still some way from the 2.5 percent midpoint of the target.

The RBA's decision to hold interest rates steady also considers geopolitical uncertainties and external risks. The November Statement on Monetary Policy (SMP) noted that there remains a high level of uncertainty about the outlook abroad, with most central banks easing monetary policy while remaining alert to risks on both sides. Additionally, public authorities in China have responded to a weak economic outlook by implementing expansionary policies, although the impact and specific details of these measures remain uncertain. Geopolitical uncertainties, such as conflicts abroad, also contribute to the external risks landscape.

In conclusion, the RBA's decision to pause rate hikes in December reflects a delicate balancing act in managing inflation and labor market dynamics. The RBA acknowledges that while headline inflation has declined, underlying inflation remains high, and labor market conditions remain tight. The RBA's priority is to ensure that policy remains sufficiently restrictive until inflation is sustainably in the target range. Investors should continue to monitor these developments and adjust their portfolios accordingly, focusing on companies with robust management and enduring business models.
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