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🇦🇺 Australia /Economy & Trade

Why the market thinks Michele Bullock is bluffing on rate hikes

From ABC Australia · () English

Summarized and contextualized by DistantNews.

At a glance

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  • The Reserve Bank of Australia (RBA) kept its cash rate unchanged at 4.1% but signaled that further tightening is possible if inflation remains too high.
  • Despite the RBA's hawkish rhetoric, financial markets have largely maintained their expectations for a steady interest rate, with some even anticipating cuts next year.
  • Economists largely believe the Australian economy is slowing, making further rate hikes unlikely, though one major bank still forecasts additional increases.

The Reserve Bank of Australia (RBA) opted to hold its benchmark interest rate steady at 4.1% on Tuesday, a decision that surprised some but was largely anticipated by markets. Governor Michele Bullock emphasized that while the "principal tool" of hiking rates was not used, the RBA retains other means, including "jawboning," to combat persistent inflation.

The board is focused on its mandate to deliver price stability and full employment. It will do what it considers necessary to achieve that outcome, including increasing the cash rate target further if required.

— Michele BullockIn the RBA's post-meeting statement.

Bullock stated that leaving rates unchanged allows the RBA time to assess the impact of previous increases on the economy. The bank will closely monitor upcoming inflation and unemployment data before its August meeting to determine the necessity of further tightening. "Inflation remains too high," Bullock reiterated, underscoring the RBA's commitment to its price stability mandate.

Today's decision does not rule out further tightening in monetary policy if that is what is required to bring inflation down.

— Michele BullockDuring the press conference following the RBA board meeting.

Despite the governor's firm stance, financial markets showed little reaction, with the odds of an August rate hike remaining in the high 20s. Major banks like Commonwealth Bank, ANZ, and NAB predict rate cuts in 2027, reflecting a belief that the RBA's hiking cycle is complete. Westpac, however, maintains a more hawkish outlook, expecting two more rate hikes unless the economy weakens significantly and inflation improves.

In making its decisions, the board will be focused on the data and what that suggests about the outlook and risks.

— Michele BullockDuring the press conference.

Most economists share the market's sentiment, believing the Australian economy is already in a downturn, making further rate increases improbable. The RBA's decision and subsequent commentary highlight the delicate balance between controlling inflation and avoiding an economic recession.

I want to be very clear that inflation remains too high.

— Michele BullockDuring the press conference.
DistantNews Editorial

Originally published by ABC Australia. Summarized and contextualized by our editorial team with added local perspective. Read our editorial standards.

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