Australia's central bank holds rates steady but keeps threatening a hike

The Reserve Bank of Australia's board voted unanimously on Tuesday to hold the cash rate at 4.35%, a decision widely expected by markets. The bank last raised rates in May, about three months ago.

The RBA's latest forecasts show inflation returning to around its 2.5% target within roughly a year. The feared inflationary impact from Middle East tensions and elevated fuel prices has so far been milder than expected, though the effects of the global oil shock could continue flowing through the economy for another one to two years. Following three consecutive rate hikes earlier this year, the board noted the economy appears to be slowing as anticipated, with even the housing downturn reducing pressure for another increase.

Bullock strikes a cautious tone

Despite inflation coming in lower than expected and unemployment ticking up slightly since the board's last meeting, governor Michele Bullock's press conference message remained firm. She said inflation is still too high and the board remains concerned about upside risks, adding that after three hikes already, the bank would act again if needed. Bullock went further than usual, personally stating she thought another hike was quite possible, though the board would wait for further data before deciding.

She explained it is important for the public to believe the bank will act if necessary. That expectation alone appears to be doing some of the work: the market-implied probability of another rate rise by year's end jumped from 53% before the announcement to 67% shortly afterward.

Observers note the central bank likely hopes and believes it won't actually need to raise rates again, but saying so publicly would undermine the threat's effectiveness in keeping inflation expectations in check.