RBA leaves cash rate unchanged at 4.35%, as expected

• Prior 4.35%
• Inflation remains above target and is proving persistent
• The outlook remains highly uncertain
• The process of returning inflation to target has been slow and bumpy
• High unit labour costs and inflation persistence suggest there are upside risks to prices
• Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth
• Momentum in economic activity has been weak, as evidenced by slow growth in GDP
• There also remains a high level of uncertainty about the overseas outlook
• Inflation in underlying terms remains too high
• It will be some time yet before inflation is sustainably in the target range
• Policy will need to be sufficiently restrictive until confidence returns that inflation is moving sustainably towards the target range
• RBA not ruling anything in or out on next policy steps
• Full statement

The decision is as you would expect and so is the language for the most part. However, the RBA is putting some emphasis on the upside risks to inflation. And that is likely to guard against markets thinking that surely the next move will be a rate cut, particularly after the softer Q2 CPI report.

In June, the RBA noted that:

“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.”

Today, they changed that up to:

“Data have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range.”

The language mainly reinforces their stance in keeping the cash rate unchanged. But it also means that we aren’t likely to expect a move in September as well. That said, it’s not like markets were pricing in anything for next month anyway. The odds of the RBA leaving policy as it is in September are at ~88% currently.

This article was written by Justin Low at www.forexlive.com.