Investing.com-- The Reserve Bank of Australia kept interest rates unchanged as widely expected on Tuesday, but said that inflation still remained too high, and that it would still consider more rate increases if price pressures remained sticky.
The RBA kept its official cash target rate at 4.35%, in line with market expectations. The move was largely priced-in by markets, amid growing bets that easing Australian inflation will give the RBA little impetus to raise interest rates further.
But the bank challenged this notion by warning that while inflation had fallen in recent months, it still remained “too high,” which in turn kept Australia’s economic outlook uncertain.
The RBA stuck to its earlier forecast that it only expects inflation to come back within its 2% to 3% annual target range by 2025, and that inflation will reach a midpoint in that range only by 2026.
“While recent data indicates that inflation is easing, it remains high… The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out,” the RBA said in a statement.
The RBA hiked rates by a cumulative 425 basis points over the past two years to combat a post-COVID spike in inflation.
Australian consumer price index inflation has fallen considerably in recent months, with a reading for the fourth quarter- released last week- showing a sharp slowdown in inflationary growth.
But CPI inflation still remained well above the RBA’s annual target.
Governor Michele Bullock has also repeatedly voiced concerns over upside risks to inflation, with particular emphasis on services price inflation, which was proving to be more sticky than headline inflation.
Recent economic data showed that the Australian economy was cooling under the weight of high interest rates and inflation. Retail sales data for December showed a large, unexpected decline in consumer spending.
The labor market- another key consideration for the RBA in changing interest rates- also showed some signs of cooling in 2023, although the central bank said on Tuesday that the sector still remained tighter than it was comfortable with.
The Australian dollar rose 0.3% after the RBA's announcement, while the ASX 200 index slightly deepened its losses.