Ignoring the Fed's interest rate cut, the Reserve Bank of Australia

Although the Federal Reserve cut interest rates sharply last week, considering the upward risk of inflation, the Reserve Bank of Australia held its ground for the seventh time in a row.

On Tuesday, the Reserve Bank of Australia (the central bank) announced the latest interest rate resolution, announcing that the key interest rate level would be maintained at 4.35%, in line with market expectations.

Since May 2022, the Reserve Bank of Australia has raised interest rates by 425 basis points. The last time it raised interest rates was in November last year. This is the seventh consecutive time that the Bank has maintained its policy interest rate at a high level in 12 years.

The monetary policy statement pointed out that although Australia's inflation has fallen sharply since its peak in 2022, it is still above the upper limit of the target range.

Despite the hawkish stance of the RBA, the market's interest rate cut expectations are still high. After the announcement of the interest rate resolution, the market bet that the possibility of interest rate reduction at the policy meeting in December is roughly the same as that before the announcement of the resolution. The yield of Australia's three-year government bonds, which is sensitive to policy, fell in a short period of time, erasing the previous increase and closing at 3.45%.

The inflation target may be postponed, paying attention to the long-term downward trend of inflation.

In the second quarter of this year, Australia's underlyiing inflation rate reached 3.9%, but it is still higher than the inflation target level of 2-3% of the country's central bank, mainly driven by non-discretionary expenditures such as insurance, education and housing.

In terms of employment, Australia's labor market has maintained a good momentum, and the unemployment rate has stabilized at a historical low of 4.2%.

In addition, the Reserve Bank of Australia has also updated its expectations for inflation trends, and it is expected that the country's inflation rate will not stabilize within the target range of 2%-3% until 2026.

Stephen Spratt, interest rate strategist at Societe Generale in Hong Kong, commented:

"The Reserve Bank of Australia used the word' sustainable' four times in its statement, stressing that short-term inflation decline is not enough to persuade them to cut interest rates."

"This seems to be a signal to the market, that is, don't read too much about tomorrow's August CPI data, although it is expected to fall back to the target range."

At present, economists generally expect the RBA's interest rate cut cycle to begin in February next year, while the market expects the bank to start the easing cycle in December with a probability of two-thirds.

Judging from the statement, the Reserve Bank of Australia has confidence in the fight against inflation, and it is expected that inflation indicators will remain an important reference for the monetary policy path in the future:

"The Committee remains firmly determined to bring inflation back to the target level and will take necessary measures to achieve this result."

"The policy needs to take enough restrictive measures until the Committee is convinced that inflation can move towards the target range in a sustainable way."

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