RBA Holds Steady While the BoJ Eyes a July Hike

For the fifth consecutive time, the Reserve Bank of Australia (RBA) maintained its key interest rates unchanged at 4.35%, their highest level since November 2011. On the other hand, the Bank of Japan (BoJ) is considering potentially tightening its monetary policy further next July, after ending its negative rates era in March 2024. (Source: ABC)

Let's take a closer look at what this means for the monetary policy trajectory of both countries:

RBA Keeps Benchmark Interest Rate Unchanged at 4.35%

Since the Australian central bank's rate hike cycle began in May 2022, mortgage holders with a typical $600,000 loan are paying roughly $1,450 more each month according to a leading financial comparison site in Australia, RateCity. 

Today, Tuesday, June 18, Australia's central bank (RBA) may have provided some relief for Australian borrowers by keeping interest rates steady at 4.35%, despite this being the highest level in over a dozen years. 

Still, borrowers shouldn't expect a permanent reprieve, as the RBA signaled its willingness to raise rates again if inflation doesn't continue falling towards its 2-3% target. In her press conference, Michele Bullock, RBA’s Chairman, even declared that a rate hike was discussed by board members during this meeting, but not a rate cut.

While inflation has dipped from its 2022 peak, it remains above the target range of 2-3% and is declining slower than expected. Consumer Price Index (CPI) for April rose 3.6% year-on-year, after 3.5% in March, and a core measure excluding volatile items and holiday travel reached 4.1% in April, after 4% in March, mirroring trends observed in December 2023.

The central bank also acknowledged ongoing economic uncertainty, highlighting the challenges in bringing inflation back under control. Additionally, last May, the central banks’ forecast projected inflation to return to the target range by the second half of 2025.

Bank of Japan Governor Ueda Hints at Potential July Rate Hike

Earlier today, Bank of Japan (BoJ) Governor Kazuo Ueda declared that the BoJ could be considering raising interest rates as early as July, even though ultimately, this decision will depend on upcoming economic data, especially information on inflation and growth.

Last week, the BoJ opted to maintain its current ultra-low interest rates and continue purchasing government bonds at a pace of roughly 6 trillion yen per month ($38 billion). However, they acknowledged significant uncertainties surrounding Japan's economic activity and prices, which could impact the future outlook of the country and influence the monetary policy trajectory.

The BoJ also announced plans to gradually reduce its substantial bond purchases, signaling a shift away from its previous aggressive monetary stimulus. 

While a more detailed strategy will be unveiled at their next meeting, Makoto Sakurai, a former BoJ board member, predicts the Japanese central bank is likely to decrease their annual bond buying by around 24 trillion yen ($152 billion) in their upcoming July guidance, which would bring their monthly purchases down to around 4 trillion yen.

Conclusion

Today’s decisions and speeches from the Reserve Bank of Australia and the Bank of Japan highlight the intricate nature of monetary policy and the different challenges both economies face. Central banks have to navigate a complex web of factors impacting inflation, growth, and employment.

In our previous market update, we explained that there are other major central banks that will be meeting this week, so many traders are likely to turn their attention to the Swiss National Bank (SNB) and ​​the Bank of England (BoE) which are due to release their rate decisions on Thursday, June 20.