RBA holds rates, defies market expectations

Reserve Bank of Australia keeps Cash Rate unchanged despite calls for a hike

By Ahmed Azzam | @3zzamous | 1 August 2023

  • RBA maintains rates despite expectations of a hike, citing easing cost pressure

  • China's Caixin manufacturing PMI hits six-month low at 49.2, signaling contraction

  • Upcoming US data includes JOLTS report and ISM factory gauge

Reserve Bank of Australia holds rates amid easing cost pressure

During its August meeting, the Reserve Bank of Australia (RBA) defied market expectations by maintaining its cash rate at 4.1% for the second consecutive month. The decision came despite consensus predictions of a 25bps rate hike. The central bank acknowledged that cost pressures in the country have been alleviating, but it emphasized that the current inflation level of 6% remained uncomfortably high. RBA officials reiterated that further monetary tightening might be necessary to steer inflation back to the target range of 2 to 3% within a reasonable timeframe. The timing and extent of any rate adjustments would hinge on the evolving state of the economy and prices. The board's projections suggest that inflation will hover around 3.25% by the end of 2024 and return to the intended corridor by late 2025. Additionally, Australia's GDP growth is expected to reach approximately 1.75% in 2024, while the unemployment rate is foreseen to gradually rise to around 4.5% by the end of next year. The central bank also chose to maintain the interest rate on Exchange Settlement balances at 4.0%.

China's Caixin manufacturing PMI dips to six-month low

China's Caixin Manufacturing Purchasing Managers' Index (PMI) declined to a six-month low of 49.2 in July, surprising analysts with a drop into contractionary territory for the first time since April. Adding to China's economic woes, the value of the nation's home sales plummeted by 33% year-on-year. The spillover effect of China's faltering recovery was felt in North Asia, with Taiwan's PMI sliding to an eight-month low and Japan's PMI also dipping.

US banks report tighter standards and weak loan demand

The Federal Reserve released data showing that banks reported tighter standards and ongoing weak demand for loans in the last quarter. The proportion of banks tightening terms on commercial and industrial lending for medium and large businesses rose to 50.8%, up from 46% in the first quarter. Concurrently, the share of banks reporting weaker demand for such loans decreased to 51.6% from 55.6%.

Upcoming US data: JOLTS report and ISM factory gauge

Upcoming US data includes the JOLTS report, which is expected to show a dip to 9.6 million in June from 9.8 million. Labor market improvements have largely been driven by demand-side factors. Moreover, construction spending is projected to rise by 0.6%, indicating a slowdown from the previous 0.9% growth. Meanwhile, July's ISM factory gauge is anticipated to advance, bringing further insights into the state of the US manufacturing sector.