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(Bloomberg) -- Australia’s central bank assessed that keeping interest rates unchanged this year would have resulted in core inflation going below the 2.5% midpoint of its target, Deputy Governor Andrew Hauser said.
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In updated economic forecasts released at the same time as Tuesday’s policy announcement, the Reserve Bank estimated that trimmed mean inflation would fall to 2.7% from mid-2025 and remain there through mid-2027. That estimate was based on market pricing for three rate cuts this year.
The RBA’s decision to cut rates even after the forecasts showed core CPI wouldn’t reach the midpoint of the 2-3% target raised questions among some economists. But Hauser highlighted another scenario.
“One of the pieces of information that the board reviewed before making its decision was an alternative version of that forecast which looked at what would happen if we held interest rates constant,” Hauser told Bloomberg in an interview in Sydney on Thursday.
“Under that forecast inflation didn’t stop at 2.7%, it undershot the midpoint. Not by a lot but by a little bit and that factor alone was quite an important input into the board’s decision.”
His comments come in a week when the RBA’s board delivered a 25-basis-point cut to take the cash rate to 4.1%, joining most global counterparts in embarking on an easing cycle. Yet Hauser expressed caution about the prospects for follow up moves, noting that core inflation at 3.2% remains above the RBA’s target.
As a result, the board is “rigorously” focused on cooling prices and success over inflation is “not a done deal,” said Hauser, who is the first foreign official to join the RBA’s senior ranks.
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“We have taken some of the restrictiveness away, but there’s still work to do to bring inflation sustainably back to the midpoint,” he said. “So we are not whamming down on the accelerator. We have eased back on the brake a little bit. That is the strategy.”
The remarks by the RBA’s No. 2 official were seen as hawkish by financial markets and sent yields on Australian 10-year government bonds above US peers by more than 1 basis point, the highest since Dec. 10. Overnight-indexed swaps still imply the RBA will move again in August though traders pared back expectations for a third cut to 70%.