The Reserve Bank of Australia keeps interest rates at a multi-year high, though its approach is less aggressive than anticipated

The Reserve Bank of Australia maintained interest rates at a 12-year high of 4.35% following its two-day May policy meeting, surprising the markets with a less aggressive stance than anticipated, as many expected signals of another rate increase.

RBA Governor Michele Bullock stated that the interest rates are at the appropriate level after holding them steady for a sixth consecutive month, but she cautioned about the risks of elevated inflation, suggesting that easing monetary policy in the near future is unlikely.

Although policymakers considered raising interest rates, they ultimately concluded that monetary policy was sufficiently restrictive to bring inflation back to the bank’s 2-3% target band by late 2025. Consequently, they set aside expectations for further tightening for now.

Nevertheless, the RBA emphasized its readiness to intervene if economic conditions worsen due to high borrowing costs.

Inflation in Australia declined less than expected in the first quarter, presenting significant challenges for the central bank. Meanwhile, recent labor market data indicated only a gradual loosening, with an unemployment rate of 3.8% in March.

RBA economists predict that inflation will rise from 3.6% in the first quarter to 3.8% and remain steady until the end of the year, assuming there are no rate cuts until mid-2025.

Like other major central banks, the RBA grapples with similar challenges in bringing inflation back to target levels, complicating the outlook for future rate cuts.