The Reserve Bank of Australia (RBA) maintains a cautious tone, with swap traders estimating less than a 30% chance of a rate hike in the first half of 2024...

At 11:30 AM on Tuesday, the RBA kept the cash rate unchanged at 4.35%, in line with market expectations. The Australian dollar fell more than 20 points against the US dollar following the news.

As the market widely anticipated that the RBA would keep rates on hold, all eyes were on the forward guidance provided by RBA Governor Philip Lowe in the policy statement, which would give the Australian dollar a new directional impetus. The RBA stated that the committee is determined to return the inflation rate to the target level, and whether further rate hikes are needed will depend on the data.

After the RBA's interest rate decision, swap traders reduced their bets on another rate hike. They now believe that there is less than a 30% chance of a rate hike in the first half of 2024, down from the more than 40% expected before the statement was released.

Against the backdrop of renewed inflationary pressures, the RBA raised the benchmark rate by 25 basis points to 4.35% from 4.10% in November, after keeping rates unchanged for four consecutive meetings. Since then, inflation and retail spending in Australia have cooled, reinforcing the RBA's rationale for keeping the cash rate unchanged this week.

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Data released by the Australian Bureau of Statistics (ABS) last Wednesday showed that the October CPI year-on-year growth rate recorded 4.9%, slowing down from the previous 5.6% increase and below the expected 5.2%. The core inflation indicator closely watched by the RBA grew by 5.3% year-on-year in October, down from 5.4% the previous month.

Meanwhile, Australia's October retail sales fell 0.2% month-on-month, missing the expected 0.2% growth and reversing the 0.9% increase in September. The weak economic indicators justified the central bank's expected pause in the rate hiking cycle.

The RBA stated that the latest data is in line with the bank's expectations. The October CPI indicators suggest that inflation continues to ease, mainly affected by the goods sector; however, inflation has not yet provided more information about service sector inflation.

It has proven that the RBA has been cautious in its current actions. The recent mixed economic data, with the real estate market reaching a historical high, housing loans surging in October, and business confidence remaining strong. On the other hand, consumer sentiment is low, the labor market is showing signs of loosening, and economists predict that the unemployment rate will soon rise from the current 3.7%.

Institutional analysis points out that the RBA has abandoned the extremely hawkish statement. It appears that the central bank has ended rate hikes, and the current question is when inflation data can prove that rate cuts are justified.Analysts at Fxstreet believe that the Reserve Bank of Australia (RBA) may need to wait for the fourth-quarter inflation report in January to decide on the next interest rate move at the first policy meeting in February next year. RBA Governor Philip Lowe stated in a speech at the Hong Kong Monetary Authority and Bank for International Settlements high-level meeting last Tuesday, "Central banks must be 'a little cautious' in using interest rates to reduce inflation without increasing unemployment."