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Investing.com — The Reserve Bank of Australia is widely expected to keep interest rates on hold at its board meeting this Tuesday, especially on when it plans to start cutting interest rates as inflation declines. All eyes are on the signal from President Michel Block.
The Reserve Bank of Australia (RBA) plans to keep interest rates unchanged at 4.35%, with little reason to raise rates after a series of slowing inflation indicators.
Data released last week showed Australia's inflation rate was lower than expected in the fourth quarter, with the pace of growth slowing significantly from the previous quarter. The December A also showed that inflation was moving closer to the RBA's annual target range of 2-3%.
Australia's fall in inflation comes as the impact of the Reserve Bank of Australia's (RBA) interest rate hikes in 2022 and 2023 takes hold in the economy. Lower inflation is the main driver of expectations for a rate cut from the RBA in 2024.
The RBA has raised interest rates by a cumulative 425 basis points over the past two years in a bid to curb rising inflation following the coronavirus outbreak.
But the central bank has so far given little indication of when it will start cutting rates. Block also warned markets that inflation could remain high, citing upside risks from services inflation and a strong labor market.
Although inflation has slowed significantly in recent months, it remains well above the RBA's annual target range, giving the central bank little incentive to start cutting rates in the near term.
Australia's labor market has also remained generally strong in recent months. Although the slowdown in working hours growth indicates some cooling, unemployment remains low and Australia's labor force participation rate remains near record highs.
A cooling labor market is also a key consideration for the RBA as it begins to cut interest rates.
“…the case for raising interest rates from here on is steadily losing momentum. If inflation declines further and the real economy remains weak in the coming months, the Board will be able to keep inflation on target at a desirable date. We expect that we will have sufficient confidence that we will return to the mentioned in the memo.
Mr Ellis added that he did not expect the RBA to start cutting rates until September.
Despite the recent decline in inflation, the RBA remains firm in its forecast that inflation will not reach its target range until 2025. Such a scenario could encourage central banks to keep interest rates high for an extended period of time.
However, Australia's economic growth and business activity have slowed sharply in recent months. Further economic weakness could lead to an early rate cut by the RBA, especially given the potential domestic recession risks.
Tuesday's interest rate decision also marks the RBA's first meeting following implementation of significant changes to its regulatory structure and meeting frequency. The central bank's meetings will be reduced from 11 to eight a year, and will now span two days.
The index fell 0.1% on Monday in anticipation of the decision, leaving the index down nearly 1%.
