Australia’s central bank kept interest rates at a 12-year high, and highlighted that inflation is proving sticky, suggesting it will be some time before policymakers are ready to signal easing.

The Reserve Bank of Australia (RBA) held its cash rate at 4.35% for a fifth straight meeting on Tuesday, and restated that it wasn’t “ruling anything in or out”, a signal that a hike isn’t out of the question. The RBA’s goal is to slow consumer prices while holding onto significant job gains since the Covid-19 pandemic.

“While recent data have been mixed, they have reinforced the need to remain vigilant to upside risks to inflation,” the rate-setting board said in a statement. “The board will rely upon the data and the evolving assessment of risks.”

The Australian dollar was little changed after the decision, while the yield on policy-sensitive three year bonds edged up, as traders finessed bets on policy easing this year. Money markets are pricing a less than 40% chance of a rate cut by December, down from 50% prior to the release.

A comparison of Tuesday’s statement against May’s release showed a change to the RBA’s language around inflation. It described the consumer price index as “above target” and “proving persistent”, compared to “high” and “falling more gradually than expected”.

The RBA said there is still “excess demand in the economy”, as well as “elevated domestic cost pressures, for both labour and non-labour inputs”.

That assessment puts it on the hawkish side of a diverging global policy outlook. The Bank of Canada lowered its benchmark rate by 25 basis points earlier in June, making it the first Group of Seven central bank to kick off an easing cycle. The European Central Bank soon followed, while the Swiss National Bank made its move to cut in March. 

By contrast, the US Federal Reserve pared back projections for monetary easing, and policymakers from Norway to New Zealand are also signalling - or likely to - that they are still not sufficiently convinced about disinflation to start cutting. In the UK, a looming election and lingering price pressures are adding to the case for the Bank of England - which meets on Thursday - to wait at least until August before lowering rates.

RBA governor Michele Bullock has repeatedly pushed back against speculation of near-term easing, reflecting forecasts that inflation will only return to target in late 2025. Bullock has maintained maximum policy optionality this year, saying she needs to be confident that price growth is moving sustainably back to the 2%-3% target and signalling discomfort over inflation’s trajectory.

Since the RBA’s last meeting, data has shown that the Australian economy remains weak. At the same time, the job market is still tight with unemployment at 4%, generating optimism among policymakers that they can engineer a soft landing. 

One of the unknown factors for the central bank is the impact of income-tax cuts and cost-of-living rebates on power bills to Australia’s 10.4 million households that begin on July 1. Economists say the measures will help shore up a weakening economy, while Bullock said this month she didn’t anticipate the cash to have a material impact on the RBA’s inflation forecasts.

“Recent budget outcomes may also have an impact on demand, although federal and state energy rebates will temporarily reduce headline inflation,” the RBA board said. “The persistence of services price inflation is a key uncertainty.” 

  - Bloomberg