RBA Holds Rates Steady, Shocking Markets and Shifting Economic Expectations
RBA Holds Rates Steady, Shocking Markets and Shifting Economic Expectations
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The Reserve Bank of Australia (RBA) has decided to keep the official cash rate steady at 3.85%, taking many by surprise after expectations of a 25-basis-point cut had built up in financial circles.
This unexpected move comes amid recent data indicating easing inflation and weaker than anticipated economic growth, conflicting with prior predictions of a cut.
Anne Flaherty, Senior Economist at REA Group, noted the central bank's decision countered widespread expectations. She remarked that while most forecasters still predict rate reductions later in the year, holding the rate might slow the pace of property price growth experienced after cuts earlier this year. With prices up nationally by 3.2% so far this year, budget constraints remain a challenge for many Australians grappling with affordability issues.
Dwyfor Evans of State Street Markets viewed the RBA's decision as surprising but justifiable, noting the strong labour market alongside a balanced perspective on inflation. He highlighted uncertainty surrounding demand and supply influences, with a renewed vigour in the housing market providing significant reasons for the RBA's pause.
Krishna Bhimavarapu, from State Street Investment Management, expressed perplexity over the decision, emphasising signs of weak economic momentum. With high household debt burdening Australian consumers, he anticipates a possible sharper rate cut could occur as early as August, potentially reaching a cash rate of 3.10% by December.
Adam Bowe at PIMCO asserted that despite holding the rate at 3.85%, the RBA is likely to continue its easing trajectory. He underscored that the unchanged policy rate, amid restrictive monetary conditions, suggests a strategic pause while ensuring inflation remains within the targeted range. External factors such as geopolitical tensions and trade barriers are expected to contribute to a deeper rate reduction cycle, potentially bringing the cash rate below 3.0%.
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Interest Coverage Ratio: A measure of a company's ability to make interest payments on its debt, calculated as EBIT divided by interest expense.
