RBA's Michelle Bullock says no cuts expected in next six months after leaving interest rates on hold
RBA governor Michele Bullock has made it clear that the RBA's highest priority is returning inflation to target within a reasonable timeframe. (AAP: Mick Tsikas)
The Reserve Bank of Australia (RBA) has kept interest rates on hold at 4.35 per cent.
Interest rates will remain at this level for another six weeks, until the RBA Board's next meeting in late September.
The decision comes amid a dramatic spike in volatility in financial and stock markets in recent days, with a huge stock sell-off wiping trillions of dollars in value from major tech companies globally.
"Financial markets have been volatile of late and the Australian dollar has depreciated," the RBA Board said in a statement.
"Geopolitical uncertainties remain elevated, which may have implications for supply chains.
"The board will rely upon the data and the evolving assessment of risks to guide its decisions.
"In doing so, it will continue to pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market," it said.
The RBA has also released its latest quarterly Statement on Monetary Policy (SOMP) with updates to its official forecasts for inflation, employment, and activity levels.
The RBA now thinks it's going to take slightly longer than expected for underlying (or "trimmed mean") inflation to return to 2.5 per cent (compared to its forecasts in May), while the outlook for the labour market is looking slightly weaker than expected.
See its new forecasts below.
"Underlying inflation is forecast to return to the target range of 2-3 per cent in late 2025 and approach the midpoint in 2026," the SOMP says.
"This is a slightly slower return to target than forecast in May and is due to greater inflationary pressures in the economy.
"In part, this owes to a stronger outlook for domestic demand, led by higher public demand and a recovery in household consumption as real disposable incomes and household wealth rise. But it also reflects the assessment that the economy’s capacity to meet this demand is less than previously thought," it said.
As the graph below shows, trimmed mean inflation is currently running at an annual pace of 3.9 per cent.
A near-term rate cut isn't on the cards, and there won't be a recession (at this stage)
In her post-meeting press conference, RBA governor Michele Bullock said the board discussed the recent volatility in global financial markets.
But she urged people to keep calm heads in the face of the rising anxiety.
"In part, this [volatility] is reflecting the markets adjusting to economic news in a period where there's already considerable uncertainty about the outlook, and we'll be keeping an eye on this, as you'd expect," she said.
"The board discussed it. Obviously it didn't play a role in the decision itself, but it is of interest and we do need to watch it."
She said a near-term cut in interest rates wasn't on the cards, and she wasn't expecting Australia to fall into recession at this point.
She said the board only considered lifting rates, or keeping rates steady.
"Based on what I know today ... what we can say is that a near-term reduction in the cash rate doesn't align with the board's current thinking," she said.
"We've seen from overseas experience how bumpy inflation can be on the way down and across the economy, we need to see demand and supply coming back into better balance.
"I understand that this is not what people want to hear. I know there are many households and small businesses that are struggling with interest rates where they are.
"Are we heading for recession? I don't believe so, and the board doesn't believe so, because we still believe that we're on that narrow path.
"Having said that, we are data dependent, and there's a number of things ... that could result in the economy slowing much more quickly than we expect and we need to be alert to those.
"If they come to pass, then yes, interest rate cuts would be on the agenda," she said.
Why are global financial markets so volatile?
Ms Bullock said members of the RBA Board were briefed this week about the recent ructions in global markets.
The CBOE Volatility Index — a real-time market index that represents the market's expectation of 30-day forward-looking volatility — jumped significantly higher on Monday as trillions of dollars in value were wiped from global stock markets.
It hit levels last seen in the aftermath of the 2020 COVID lockdowns.
Ms Bullock said there was a sense that investors may have overreacted to higher-than-expected unemployment data in the United States.
But she said Japan's decision to lift interest rates slightly had caught some traders off guard too.
"It was one number, but it was a reassessment by some parts of the market to the US economy," she said.
"Things have settled down a bit today. And as I said earlier, the dramatic reaction in the equity market, in particular, was partly driven by investment decisions [by] people who were borrowing in Japan and investing in the United States [who were] all of a sudden … finding, 'oh dear, maybe I better reverse this'.
"So there's a lot of sort of fundamental stuff going on as well, so I think we just need to wait and see," she said.
Westpac's Damian McColough and Richard Franulovich said the Australian dollar's value, compared to the United States dollar, was set to remain "choppy and challenging" in coming months and the ongoing risk of further "volatility shocks" couldn't be ruled out.
"A range of key risks likely ebb and flow in coming weeks and months, triggering potentially rapid sentiment shifts in both directions," they wrote in a note on Tuesday.
"Cracks in the US labour market have upset the soft-landing narrative, Mideast geopolitics remain fluid, while the US election rate is close to a statistical dead heat.
"Big falls in global markets have wrought substantial P&L [product and loss statement] damage beyond leveraged participants and the risk is that another round of position adjustment from longer term investors and balance sheets might trigger another round of volatility."