Sydney, Oct 3: The Reserve Bank of Australia’s (RBA) Board opted to keep the cash rate target unchanged at 4.10 percent and maintain the interest rate paid on Exchange Settlement balances at 4.00 percent. This decision follows a series of interest rate hikes totaling 4 percentage points since May of the previous year.
The primary objective of these rate increases has been to establish a more sustainable equilibrium between supply and demand in the economy, a mission expected to persist.
Given the ongoing economic uncertainties and the need to evaluate the effects of previous rate adjustments, the Board has chosen stability this month, allowing for a comprehensive assessment of economic conditions.
In terms of inflation, Australia has passed its peak, but inflation rates remain elevated and are likely to stay that way for some time.
Recent indicators suggest that while goods price inflation has moderated, the prices of many services continue to rise notably, with a noticeable uptick in fuel prices and persistently high rent inflation.
The central forecast anticipates a gradual decline in Consumer Price Index (CPI) inflation, aiming to return it to the 2–3 percent target range by late 2025.
While the Australian economy exhibited stronger-than-expected growth in the first half of the year, it continues to operate below its potential, experiencing a period of subpar growth expected to persist. High inflation exerts downward pressure on real incomes, resulting in weak household consumption growth and a sluggish housing investment sector.
Nevertheless, labor market conditions remain tight, albeit with some easing. The economy and employment growth are expected to remain below trend, causing a gradual increase in the unemployment rate to approximately 4½ percent by late next year. Wages have seen an uptick over the past year but remain consistent with the inflation target, contingent upon productivity growth improvements.
Restoring inflation to target remains the Board’s paramount objective. High inflation poses challenges to individuals and adversely affects economic functioning. It erodes savings, strains household budgets, complicates business planning and investments, and exacerbates income inequality. Furthermore, entrenched high inflation expectations could lead to even more costly measures to reduce it in the future, including higher interest rates and increased unemployment. Thus far, medium-term inflation expectations have remained aligned with the inflation target, a trend the Board intends to uphold.
Recent data align with the projection of inflation returning to the 2–3 percent target range in the foreseeable future, accompanied by continued growth in output and employment. Although growth has moderated, inflation is receding, and the labor market remains robust, with the economy operating at a high level of capacity utilization.
However, the outlook is marked by significant uncertainties. Notably, services price inflation has exhibited surprising resilience internationally, potentially translating into similar trends in Australia. Uncertainties also revolve around the timing of monetary policy effects, the response of firms’ pricing decisions and wages to slower economic growth amid tight labor market conditions. Household consumption’s future remains uncertain, with many households grappling with financial constraints, even as some benefit from rising housing prices, substantial savings, and increased interest income. Globally, uncertainty persists regarding the Chinese economy, largely attributed to ongoing property market challenges.
The Board acknowledges that additional monetary policy tightening may be necessary to ensure a timely return of inflation to the target range. However, this will hinge on evolving data and risk assessments. In its decision-making process, the Board will continue to closely monitor global economic developments, household spending trends, inflation and labor market prospects. The Board remains steadfast in its commitment to restoring inflation to the target range and is prepared to take the necessary measures to achieve this goal.
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