RBA Keeps Rates Steady, Says All Policy Options Remain on the Table

SYDNEY—The Reserve Bank of Australia said Tuesday that it still can’t rule out the possibility that interest rates will need to be raised further, adding that inflation remains too high and is expected to remain elevated for some time yet.

The RBA left its official cash rate on hold at 4.35% at its policy meeting. The decision was widely expected by economists.

“While recent data indicate that inflation is easing, it remains high. The board expects that it will be some time yet before inflation is sustainably in the target range,” the RBA’s policy setting board said Tuesday.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out,” it added.

The RBA’s guidance was little changed from its policy announcement in February, and will buy it time before the release of first-quarter inflation and economic growth data in coming weeks.

The threat of further interest rate increases stems from the fact that while inflation has fallen to its lowest level in two years, it remains significantly above the RBA’s 2%-3% target band at a time when there is still pressure building under wages, while the center-right Labor government will hand out income tax cuts in the middle of the year.

“The board needs to be confident that inflation is moving sustainably towards the target range. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case,” the RBA said.

Inflation continues to be fueled by things like soaring rents and rising electricity and insurance costs, areas of the economy the RBA’s policy instrument of interest rates can only affect at the margin.

The RBA will continue to lag behind many other major central banks that are already pointing toward the probability that interest rates could fall soon.

The lag in Australia is partly due to the fact that interest rates weren’t raised by the same amount seen in other countries, as the RBA wanted to protect employment.

The RBA isn’t forecasting inflation to return to its target band until early 2026, which means inflation will have been outside of the band for close to four years.

Still, the likelihood that the RBA actually does deliver a further increase in interest rates appears low given that the economy’s growth rate is at its slowest in 30 years, while unemployment has risen quickly over recent months.

“The RBA stuck to its hawkish guns at today’s meeting but we think it will pivot towards policy easing by August this year…but the board clearly isn’t letting down their guard,” said Marcel Thieliant , head of Asia-Pacific operations at Capital Economics.