RBA interest rates: Central bank holds the line in fight against inflation with yet another pause on rates

Interest rates are unlikely to fall in the near future, Governor Michele Bullock says — but the Reserve Bank did not consider a hike today, either.

The RBA left its benchmark interest rate unchanged at 4.35 per cent, where it has remained since November 2023.

The central bank held firm despite growing political pressure for rates to fall, and a supersized cut in the United States last week.

Ms Bullock told reporters the RBA’s board had not considered increasing or cutting rates — focusing discussion instead on what would need to change to prompt a move up or down.

“We’re not ruling out we might raise, we’re not ruling out we might cut,” she said.

“We think we’re in the right spot at the moment.”

But Ms Bullock repeated guidance from August that rates would likely not be reduced in the near term, widely believed to mean no move for the rest of 2024.

Deutsche Bank reckons borrowers may need to wait until the June quarter next year for relief.

“It is unfashionable, and not our base case, but the risk of a rate hike is not zero,” chief economist Phil O’Donaghoe said.

UBS and AMP both predicted a cut in February, with AMP chief economist Shane Oliver saying the RBA was still more focused on high inflation than rising unemployment.

That’s especially clear in the RBA board’s statement, which declared returning inflation to target “sustainably” was still top priority.

The bank will judge its progress using underlying data which removes volatile items, rather than the headline inflation figure.

It’s a reminder the RBA will ignore Federal and State Government power credits and policies designed to temporarily lower the consumer price index, ahead of fresh numbers from the Australian Bureau of Statistics due on Wednesday.

Underlying inflation won’t return sustainably to target until 2026, the RBA forecasts.

EY chief economist Cherelle Murphy said the RBA had clearly recognised that “temporary government cost-of-living relief alone is not enough to push inflation down, and keep it down”.

Ms Murphy said the tight jobs market and poor productivity growth added to risks underlying inflation would be too high.

“As we have argued, the pace of government spending needs to be contained across both the Commonwealth and States to give the economy the best chance at finding a balance where there is no more upward pressure on inflation,” she said.

“Spending by governments is currently adding stimulus at a time when the economy is capacity constrained — meaning the journey to lower rates is slower than it needs to be.”

The RBA did identify threats on the horizon: softer growth in China, overseas banks cutting rates, lags in the full impact of previous hikes and a slow recovery of household spending.

Inflation has been stuck above the banks’s target zone and unemployment is still below the long-term sustainable level which would help keep rising prices under control.

Almost 48,000 jobs were created in August.

That’s despite a slowdown of economic activity, which has been close to the softest in decades.

On Monday night, money markets were tipping just a one-in-10 chance of a cut in September, and a Bloomberg survey of economists found that most expected rates to stay unchanged for the rest of the year.

The central bank came under attack in recent weeks from Federal Treasurer Jim Chalmers for “smashing the economy” and from his predecessor Wayne Swan for “punching itself in the face”.

But Dr Chalmers had been under fire for huge spending growth which has added to inflation pressure.

The Greens have refused to support Dr Chalmers’ proposed RBA reforms unless he intervenes to lower interest rates — with warnings that will shred the central bank’s independence and risk prices surging again.