Australia's central bank held its cash rate steady at 4.35% for a second straight meeting on Tuesday, saying the economy was slowing as expected, but warned it might hike again if needed to control inflation.
Reserve Bank of Australia Governor Michele Bullock struck a hawkish tone at the post-meeting press conference by saying that she personally thought it was "quite possible" that rates may need to go up again, keeping alive the risk of a fourth rate increase this year.
Wrapping up the August policy meeting, the RBA said aggregate demand needed to stay subdued to reduce capacity pressures, and it would do what was necessary to bring inflation back to target, including increasing the cash rate target further if upside risks materialise.
Markets had wagered on a steady outcome given inflation data had come in under forecasts in the second quarter, while the housing market had weakened more than policymakers had expected.
Bullock said unlike in June, a rate hike was discussed this time amid the re-escalation in the Middle East conflict, and the board was thinking hard about when it might be appropriate to raise rates.
"And we will go again if we need to. And I think personally that it is quite possible we might need to go, but we will wait and see what the data tells us," said Bullock.
The RBA has already raised rates by 75 basis points this year — fully reversing the amount of policy easing from 2025 — as it struggled to contain stubborn inflationary pressures in the economy driven by surging energy costs.
Bullock said last month that a further slowdown in the economy may be required to bring inflation down.
Tuesday's unanimous decision was largely as expected. The Australian dollar was flat at $0.7055, while 3-year government bond yields rose 2 basis points to 4.572%.
After Bullock's hawkish comments, swaps now imply around a 50% chance of a rate increase in November, while pricing in 80% likelihood of a move by early next year.
Housing slowdown
Higher borrowing costs brought a record boom in the housing market to an abrupt end, with tumbling auction clearance rates, a plunge in loan applications and a slump in sales signalling tough conditions ahead.
However, consumer spending stayed solid, the labour market kept churning out more jobs and the recent re-escalation of the Middle East conflict kept policymakers wary of pass-throughs from higher oil prices to other parts of the economy.
The closely watched second-quarter inflation data surprised on the downside, giving the RBA room to hold fire this month.
Updated forecasts from the RBA showed inflation is now expected to move back to the 2% to 3% target band in the second half of next year, a timeframe that Bullock has called "reasonable" given the economic shocks in recent years.
Consumer price inflation is projected to ease to 3.6% by the end of the year from 3.9% in the second quarter, and to 2.6% by the end of 2027.
"Today's decision should not be interpreted as an all-clear on inflation as the Reserve Bank has signalled that it remains alert to upside risks and stands ready to respond," said Cherelle Murphy, EY Oceania chief economist.
"We continue to see a material risk of further policy tightening later this year if, as we predict, inflation proves more persistent than the Reserve Bank currently expects."
(Reporting by Stella Qiu and Wayne Cole; Editing by Kevin Buckland)
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