The Reserve Bank of Australia kept interest rates unchanged as scheduled, remaining vigilant against the risk of rising inflation

According to the Zhitong Finance and Economics APP, on Tuesday, the Reserve Bank of Australia (RBA) for the fifth consecutive time kept the cash rate unchanged at 4.35%, the highest level in 12 years, in line with market expectations. The RBA also emphasized that inflation is becoming tricky and reiterated that "no possibility is ruled out," indicating that a rate hike is not entirely impossible. This decision by the RBA implies that it will take some time before policymakers are ready to send out a dovish signal.

The Monetary Policy Committee of the RBA stated in its announcement: "Despite mixed recent data, they reinforce the need to remain vigilant about the risks of rising inflation. The committee will rely on data and evolving risks for assessment."

Following the RBA's rate decision announcement, the Australian dollar remained almost unchanged. The yield on the three-year Australian government bond, sensitive to policy changes, rose slightly as traders cautiously bet on the RBA's easing policy later this year. The money market currently expects the probability of an interest rate cut by the RBA in December to be less than 40%, lower than the 50% before the rate decision announcement.

Comparing the RBA's statements on Tuesday and in May, changes in the RBA's wording on inflation can be observed. The RBA described the CPI as "above target" and "sustained," rather than "high" and "falling more slowly than expected" as described in the May statement.

The RBA also noted that there is still excess demand in the economy, as well as rising domestic cost pressures from both labor and non-labor inputs. This assessment places the RBA on the hawkish side of the global policy outlook divergence. The Bank of Canada cut its benchmark rate by 25 basis points in early June, becoming the first central bank in the Group of Seven (G7) to start a dovish cycle. The European Central Bank followed suit, also cutting rates by 25 basis points. In an earlier move in March, the Swiss National Bank also took easing action.

In contrast, the latest dot plot released by the Federal Reserve shows that policymakers on average predict only one rate cut this year, lower than the three cuts shown in the March dot plot. Policymakers from Norway to New Zealand are also hinting (or possibly doing so) that they do not have enough confidence in fighting inflation, so they will not start cutting rates. For the Bank of England, which will announce its rate decision on Thursday, the upcoming election and persistent price pressures increase the likelihood that the bank will wait until at least August to cut rates.

RBA Governor Michele Bullock has repeatedly refuted speculation about recent dovish policies, reflecting a forecast that inflation will not return to target levels until later in 2025. Michele Bullock has maintained maximum policy flexibility this year. She stated the need to have confidence in inflation sustainably returning to the 2%-3% target and expressed concerns about the inflation trajectory Shengbao Market's foreign exchange strategy director Charu Chanana stated that the Reserve Bank of Australia (RBA) has maintained its hawkish stance. She said, "The door for the RBA to raise interest rates may remain open, but the market's threshold for digesting this point will still be high." "Similarly, the space for the RBA to ease monetary policy is expected to be very limited until at least two more quarters of inflation data are seen."

Sean Langcake, the head of macroeconomic forecasting at the Australian Oxford Economics Institute, also believes that the RBA's tone is relatively tough, although he expects that the Australian benchmark interest rate will not change before 2024.

Since the last meeting of the RBA, data shows that the Australian economy remains weak. At the same time, the job market remains tight, with an unemployment rate of 4%. This has led policymakers to optimistically believe that they can achieve a soft landing. However, one unknown factor facing the RBA is that starting from July 1st, Australia will cut income taxes and provide electricity bill relief to 10.4 million households. Economists say these measures will help boost the sluggish economy. Michele Bullock stated this month that she expects these measures to have no substantial impact on the RBA's inflation forecasts.

In addition, the Reserve Bank of Australia's Monetary Policy Committee stated, "Recent budget outcomes may also affect demand, although energy subsidies from the federal and state governments will temporarily reduce overall inflation." However, the committee also added, "The continued rise in service prices is a key uncertainty factor."