RBA to hold cash rate this year, first cut seen in February- Reuters poll

By Devayani Sathyan

BENGALURU (Reuters) - Australia's central bank will hold its key interest rate at 4.35% on Tuesday and for the rest of the year, according to a Reuters poll of economists, as strong economic activity and sticky core inflation still warrant a cautious approach.

Consumer price inflation fell to 2.8% last quarter, within the Reserve Bank of Australia's 2-3% target for the first time in three years, but core inflation, stripped of volatile components, remained elevated.

During its post-COVID tightening cycle, the RBA raised rates by 425 basis points from 0.10% to 4.35%, less than many of its peers despite the risk of prolonged higher inflation.

That was partly to promote job creation, part of the central bank's mandate. The jobless rate has held relatively steady between 4.0% and 4.2% since April.

With the employment market still strong and a relatively lower peak in interest rates, the RBA is likely to be slower to ease policy than other central banks in developed nations, in line with its peers in Asia.

All 30 economists in the Oct. 30-31 poll expected the RBA to hold its official cash rate at 4.35% at the end of its two-day policy meeting on Nov. 5.

All but one also expected the central bank to leave rates unchanged at the December meeting.

"We are not expecting the RBA to change the official cash rate. Aside from that, what we could see at the margin is a slight softening in their language from hawkish to a bit more balanced," said Craig Vardy, head of fixed income at BlackRock Australasia.

"We think the data was pretty much in line with the RBA's thoughts about the path of core inflation. That is, it's still too high for them to think about cutting the cash rate in 2024...early 2025 is probably a bit more realistic."

All the major local banks - ANZ, CBA, NAB, and Westpac - forecast no rate change this year. However, all four expected the RBA to cut rates at its first meeting of 2025 in February.

Nearly 70% of respondents who had a view into next year, 20 of 29, expected a 25 basis point cut in February to 4.10%. Of the remaining nine, eight predicted no change while one saw a bigger cut to 3.75%.

Markets are not pricing in a first cut until April.

Median forecasts in the survey showed the RBA cutting rates by 75 basis points next year, to end 2025 at 3.60%, compared with a total of 225 bps of cuts expected from the U.S. Federal Reserve.

"(Core) inflation is not going to get into the target band until the middle of the third quarter...So without a recession, (the RBA) are probably not going to be in a hurry to cut rates sharply," said My Bui, economist at AMP, forecasting three rate cuts next year.

"Cutting rates is basically bringing it back to a more normal level, which in our view is slightly above 3%."

With the Fed easing much more swiftly than the RBA, the Australian dollar will regain all of its year-to-date loss of 3.5% by end-January and then trade around $0.68, according to a separate Reuters poll of foreign exchange strategists.

(Other stories from the November Reuters global economic poll)

(Reporting by Devayani Sathyan; Polling by Anant Chandak and Veronica Khongwir; Editing by Ross Finley, Kirsten Donovan)