Hopes of a February interest rate cut are fading after the central bank warned the Australian economy is still too hot.

Interest rates have been left on hold and the Reserve Bank of Australia remains steadfast in its inflation fight, even after downgrading its expectations for the economy.

On Tuesday, the bank kept the cash rate at 4.35 per cent for the 12th month in a row after its board meeting, in a move that was universally expected.

Some economists had expected a more pronounced shift in tone to reflect recent progress on inflation and the bank’s updated forecasts.

ANZ head of Australian economics Adam Boyton said the all-important final paragraph in the post-meeting statement was largely unchanged, with the central bank still not “ruling anything in or out” on its next decision.

“While headline inflation has declined substantially and will remain lower for a time, underlying inflation is more indicative of inflation momentum, and it remains too high,” the RBA board said in the statement.

Mr Boyton was expecting “more of a step towards neutral”, especially given the accompanying November statement on monetary policy included lower forecasts for underlying inflation, wages and economic growth.

“While most of these are small changes, the forecasts do appear to have evolved in a more neutral direction than the rhetoric,” he said.

The big four banks’ predictions of a February rate cut became even more “narrow”, National Australia Bank analysts said.

NAB senior economist Taylor Nugent said the central bank had a high bar to clear before it begins cutting rates.

“That’s an environment in which the risk skews firmly to a later start than NAB’s February expectation,” he said.

The RBA would need to see unemployment moving noticeably higher in the next three employment updates before its February meeting for NAB’s prediction to come to fruition.

In its statement on monetary policy, the RBA updated its peak unemployment prediction to 4.5 per cent from 4.4 per cent.

Australia’s unemployment rate has remained relatively low, despite the recent influx in migration, and that was “remarkable”, Treasury secretary Steven Kennedy said.

“It is easing now, but other countries, I mentioned a couple – Canada, New Zealand – saw this, and their labour market outcomes aren’t nearly as good,” he told a Senate estimates hearing on Wednesday.

“To have seen these people flow into supply through employment and see the aggregate rate remain low, is great, is an excellent outcome.”

Treasurer Jim Chalmers said it had been more than a year since interest rates had gone up, reflecting the government’s work to slow inflation.

The RBA’s refreshed forecasts also showed “welcome and encouraging progress in the fight against inflation”.

“What this shows is that we’ve been able to fight inflation without ignoring risks to growth and without sacrificing the gains that we have made in the labour market,” Mr Chalmers told parliament.

But Shadow Treasurer Angus Taylor said Australia was lagging behind peer countries because increased spending was creating an imbalance between supply and demand.

“Everyone is helped by lower inflation and lower interest rates and what we heard from the Reserve Bank yesterday is that interest rates are going to be higher for longer,” he told ABC Radio.

Mr Kennedy said public spending had been a strong contributor to demand in the economy over the past year.

“We’ve been particularly interested in the infrastructure market for some time, and the size of the pipeline and costs there,” he said.

Mr Kennedy said there were mixed views over the impact infrastructure projects have on the workforce available for housing construction.

“We would all like to see more infrastructure-enabling economic activity, but it has to be done in a reasonable and proportionate way.”

Poppy Johnston and Jacob Shteyman
(Australian Associated Press)