(Bloomberg) — Australia’s central bank is alert to upside risks to inflation and wants to see evidence of a further easing in core consumer prices before considering interest rate cuts, a senior Reserve Bank official said.
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In a speech on Wednesday, Assistant Governor Christopher Kent emphasized that while Australia’s monetary settings are restrictive, the extent of this remains “unclear.” He also provided a chart in his address that showed the RBA’s model-average neutral rate, or level that would neither stimulate nor restrain demand, is around 3.5%.
“We want to see evidence of a further fall in underlying inflationary pressures,” Kent said in response to a question on what it would take for the bank to move out of restrictive territory. “Data of late though have been quite mixed. They’ve reinforced the need for us to be alert to upside risks to inflation.”
The comments come ahead of monthly inflation data for May due at 11.30 a.m. Sydney time. Economists forecast prices likely accelerated to an annual 3.8% from 3.6% in April.
The RBA last week held rates at a 12-year high of 4.35% as inflation remains above target. The central bank has boosted borrowing costs 13 times between May 2022 and November 2023 and continues to warn that further tightening can’t be ruled out.
In his speech at a conference in Melbourne, Kent pointed out that the estimate of the neutral rate has risen since the pandemic. Indeed, two years ago the RBA estimated it was at least 2.5%.
The neutral rate’s increase since then has been driven by a number of factors including increases in public debt, downward pressure on savings due to demographic changes and a jump in both public and private investment to support the economy’s transition to net zero emissions.
Kent said restrictive financial conditions in Australia are contributing to a demand slowdown, though recent economic data have been uneven.
“They have reinforced the need to remain vigilant to upside risks to inflation,” Kent said. “Hence, with regards to the path of interest rates, the Reserve Bank board is not ruling anything in or out.”
The impact of the RBA’s tightening cycle has fallen mainly on people with home loans with businesses proving more resilient, Kent said. Aggregate leverage of non-financial businesses is relatively low at a little over 20%, versus a pre-pandemic average of nearly 30%.
“All else equal, this decline in leverage would suggest that monetary policy is having less effect on the average business than if they were more highly leveraged,” Kent said. “Most listed companies also hold cash buffers that are slightly higher than pre-pandemic levels, and many businesses have been in a strong financial position throughout the tightening phase.”
Indicators of business financial stress generally remain low, while rates of non-performing loans remain below historical levels, he added.
(Adds Kent comment from Q&A.)
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