As global markets watch pivotal developments this week, the Reserve Bank of Australia (RBA) announced it will hold its cash rate steady at 4.35%, resisting calls for an easing of monetary policy. Meanwhile, focus shifts to the high-stakes U.S. presidential election and upcoming policy decisions from other major central banks, including the Federal Reserve and Bank of England. Investors and traders worldwide await both election results and central bank announcements, anticipating potential shifts in global markets.
RBA Holds Rates Amid Pressure to Ease
Despite a steady decline in inflation—from a peak of 7.8% under two years ago to 2.8% currently—the RBA has opted to keep rates unchanged. The RBA’s preferred trimmed mean inflation measure, which tracks core inflation, has similarly shown a consistent decline, reaching 3.2% in September. Yet, the RBA has remained cautious, citing concerns over economic resilience, particularly a strong labor market that has kept unemployment near historic lows, around 4.1%.
The bank’s decision not to cut rates appears influenced by the potential risks of premature easing, especially given the elusive “NAIRU” (non-accelerating inflation rate of unemployment) benchmark, which the RBA estimates at around 4.25%. Although calls for rate cuts are mounting, the RBA appears hesitant, noting that inflation remains marginally above its 2%-3% target. Holding rates steady, however, raises questions about how much longer Australia’s economy can sustain growth under tightened monetary conditions.
U.S. Election Outcome to Shape Market Response
This week, markets are fixated on the U.S. presidential race, where a tight contest between Vice President Kamala Harris and Republican candidate Donald Trump could sway investor sentiment. As polls close late Wednesday AEDT, financial markets are bracing for volatility, with different potential impacts depending on the election’s outcome.
Matthew Sherwood, head of investment strategy at Perpetual, suggests that a divided U.S. government could bring a more tempered response from bond and equity markets. “With a split Congress, extreme policies from either side are less likely to pass, which could create stability in market outlook,” Sherwood notes. On the other hand, a Republican victory might prompt a sell-off in U.S. Treasury bonds, with yields potentially rising to around 4.5% amid expectations of stronger growth and a shorter Fed easing cycle.
A Harris-led Democratic administration, in contrast, is likely to prompt a rally in bonds but could temper equity gains as markets weigh the potential for increased corporate tax rates.
Federal Reserve Decision: Anticipating a Rate Cut
The Federal Reserve’s upcoming rate decision, due Thursday (Friday AEDT), will be closely watched. Fed Chair Jerome Powell is expected to announce a 25-basis-point cut, which would bring the Fed funds rate to a range of 4.5%–4.75%. This marks the second rate cut in this easing cycle, following a 50-basis-point reduction in September.
According to Westpac economists, the Fed is likely to underscore its confidence in economic resilience while acknowledging that rates are still high relative to neutral levels. Despite the potential market-moving U.S. election, analysts believe the Fed will stick to its economic outlook and delay any immediate reaction to election-related economic shifts.
Why the RBA Decision Matters
The RBA’s decision to hold rates comes amid an extended period of rate hikes, which have seen Australian interest rates climb 13 times since 2022 to control inflation. Despite these increases, Australia’s inflation rate remains stubbornly near the upper end of the RBA’s target range. The market has gradually priced in a potential easing cycle, with National Australia Bank economists projecting a slow-cutting cycle possibly beginning in 2025 if inflation continues to soften.
With rate cuts expected from global central banks like the Fed and Bank of England, the RBA’s cautious stance stands out. HSBC’s chief economist for Australia and New Zealand, Paul Bloxham, noted that the RBA may delay cuts even further, possibly missing the easing window altogether if inflation remains sticky.
What’s Next?
As traders analyze both the U.S. election outcome and central bank policy shifts, the interplay of fiscal policies, monetary actions, and labor market trends will likely shape the economic landscape over the coming months. The Federal Reserve, Bank of England, and RBA decisions reflect a balancing act between fostering growth and keeping inflation in check.
In Australia, the RBA’s decision to hold may heighten pressure on businesses and consumers, especially as global peers begin to ease their monetary stances. For now, the RBA maintains a conservative approach, watching carefully as both global and domestic forces influence its next moves.
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