By James Glynn
SYDNEY--The Reserve Bank of Australia left interest rates on hold as expected on Tuesday, but hinted that the next move will be a rise in interest rates next year.
Following a two-day policy meeting, the RBA held the official cash rate at 3.60%--where it has been since August.
"Recent data suggest the risks to inflation have tilted to the upside, but it will take a little longer to assess the persistence of inflationary pressures," the central bank said in a statement.
"Private demand is recovering," it said, adding that labor market conditions still look "a little tight" but should ease modestly.
The decision follows a string of reports showing a deteriorating inflation outlook and warnings from the RBA that the economy is starting to grind up against capacity constraints.
The hawkish speculation has seen the Australian dollar and government bond yields rise strongly over the last week. The Aussie fell to US$0.6611 from US$0.6628 after Tuesday's outcome.
The S&P/ASX 200 benchmark equities index briefly hit a session high moments after the decision. Down by almost 0.4% shortly before the rate call, the ASX 200 wiped out almost all its losses before retreating to sit about 0.2% lower.
Data from the National Australia Bank earlier in the day showed that capacity utilization across the economy was at its highest level in 18 months, which chief economist Sally Auld said will add to the RBA's level of concern about the inflation outlook.
The RBA has cut interest rates three times since February, but inflation has returned as economic activity has recovered fueled by consumer spending, government spending and a rebound in business investment.
Low productivity and rising wages growth has also alarmed policy makers.
While the central bank said that some of the recent rise in inflation might be temporary, it admitted that there has also been a significant deterioration in the outlook for price pressures.
"There is uncertainty about how much signal to take from the monthly CPI data given it is a new data series," it said. "Nevertheless, the data do suggest some signs of a more broadly based pick-up in inflation, part of which may be persistent and will bear close monitoring."
Write to James Glynn at james.glynn@wsj.com
(END) Dow Jones Newswires
12-08-25 2301ET
