Australia's central bank opted to keep interest rates unchanged on Tuesday, indicating a reduced inclination towards tightening monetary policy. This decision reflects increased confidence in the economy's ability to steer inflation back towards its target, despite its slowing pace.
During its two-day March policy meeting, the Reserve Bank of Australia (RBA) maintained rates at 4.35%, the highest level in 12 years, marking the third consecutive meeting without a change. The RBA emphasized a flexible approach to policy, refraining from definitive actions at this stage.
Market expectations leaned heavily towards a steady outcome, given that inflation has remained at a two-year low and economic growth has decelerated significantly.
The RBA Board, in its statement, acknowledged the uncertainty surrounding the optimal path for interest rates to facilitate a timely return of inflation to its target range. Notably, the language shifted from suggesting a possibility of further rate hikes to a more neutral stance.
Following the RBA's announcement, the Australian dollar depreciated by 0.3% to $0.6542. Meanwhile, three-year bond yields decreased by 5 basis points to 3.705%, with markets now pricing in a higher probability of easing by 43 basis points this year.
Analysts anticipate the RBA to abandon any lingering tightening bias at its June meeting, potentially followed by rate cuts in August and November. This projection suggests a year-end cash rate of 3.85%.
Recent data indicate that previous rate hikes, totaling 425 basis points since May 2022, have effectively curbed demand. Inflation remained subdued at 3.4% in January, while economic growth in the last quarter was modest at 0.2%, attributed to stagnant household consumption and a slight increase in the unemployment rate to 4.1%.
Although domestic economic indicators have been lackluster, market expectations for RBA easing have diminished, partly due to shifts in anticipated U.S. interest rates influenced by persistent inflation. Consequently, forecasts for the timing of the Federal Reserve's first rate cut have been postponed to June or possibly July.
Furthermore, the Bank of Japan's recent decision marks a significant departure from its long-standing negative interest rates policy, signaling a notable shift in global monetary policy dynamics.
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