RBA Holds Interest Rates Steady, Signals Readiness To Act Amid Economic Shifts

The Reserve Bank of Australia (RBA) has stressed that there will be no immediate change to interest rates, which have remained steady for the past year, while outlining a range of scenarios that could cause the economy to diverge from current forecasts and may require a timely policy response.

Minutes from the RBA's Nov. 4-5 board meeting were released on Tuesday, which showed that the bank again considered various scenarios in which the cash rate of 4.35% might need to be raised, lowered, or maintained for a prolonged period.

While the details of the meetings revealed no major surprises, the central bank considered potential economic scenarios that could prompt it to take swift action on its policies.

"It is important to remain forward looking, avoiding an excessive reliance on backward-looking information that may lead the board to react too late to a change in economic conditions," Reuters reported, citing RBA statement.

The RBA explained that it might need to raise interest rates or implement other tightening measures if it determines that the current policies were not having a strong enough effect on the economy. The bank will, however, closely monitor key data, including the growth of credit, how willing the financial institutions were to lend, and trends in asset prices.

Among the other scenarios that could impact cash rate were changes in consumer spending and the job market. Bank data showed weaker spending than expected, despite tax cuts, while the unemployment rate has remained steady at 4.1%.

The RBA also noted that if the economy's supply capacity turned out to be more limited than expected, especially if productivity growth remained slow, it might require a tighter policy approach. Additionally, the central bank was closely monitoring potential changes in U.S. economic policy and the size of China's stimulus package.

As underlying inflation remained "too high," the RBA noted that it wanted to see consistent inflation data before considering a rate cut, to ensure any decline is sustainable, AAP reported.

"Members noted that this could warrant an easing in the cash rate target, but that they would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable," the details of the meetings revealed.

While three of the big four banks anticipate rate cuts to begin in February, National Australia Bank forecast that rates may remain unchanged until May.

Tapas Strickland, NAB head of markets economics, pointed out the RBA's minutes were aligned with the bank's forecast. "But on our read will require some further loosening in the labor market (which we forecast) and two quarterly inflation prints consistent with further easing in inflation pressures (which we are also forecasting)," he said.

The RBA expected inflation to fall within its target band by 2026.