Reserve Bank of Australia Holds Cash Rate Steady Amid Uncertainty

Highlights:

• RBA holds cash rate at 4.35%, citing persistent inflation despite recent declines, with forecasts indicating inflation may not return to target until 2026.
• Economic growth remains weak due to lower real disposable incomes and restrictive financial conditions, though consumer demand shows some resilience.
• Labour market conditions remain tight, with the unemployment rate at 4.2% and wage pressures easing, but productivity levels still lagging behind.

The Reserve Bank of Australia (RBA) Board, at its meeting on 24 September 2024, decided to leave the cash rate target unchanged at 4.35%, with the interest rate paid on Exchange Settlement balances remaining at 4.25%. The decision comes as inflation, though moderated from its 2022 peak, remains above the central bank's 2-3% target range. The RBA's forecast suggests inflation may not return to target until 2026, indicating a prolonged period of elevated rates.

Inflation Moderates but Remains Stubbornly High

While inflation has substantially declined, it remains persistent. According to the RBA, the trimmed mean inflation rate stood at 3.9% over the year to the June quarter, in line with earlier projections from the May Statement on Monetary Policy. Headline inflation, measured by the monthly Consumer Price Index (CPI), fell in July and is expected to decrease further temporarily due to federal and state cost of living relief initiatives. However, underlying inflation, which has exceeded the midpoint of the target range for 11 consecutive quarters, shows little sign of rapid decline.

Economic Growth Slows Amid Wage and Labour Market Pressures

At the time of writing, recent data confirms weak economic growth in the June quarter, driven by lower real disposable incomes and restrictive financial conditions. However, consumer demand, bolstered by spending from temporary residents, has remained somewhat resilient. Despite this, wage pressures have eased, though productivity levels continue to lag behind, reflecting broader challenges in the economy.

RBA’s Focus on Inflation Remains Firm

The RBA reiterated its commitment to returning inflation to its target, acknowledging the ongoing uncertainty in both domestic and global economic conditions. The Board remains cautious about the risks of slower-than-expected consumption growth and continues to emphasize the importance of maintaining sufficiently restrictive policy to manage inflation expectations.

The RBA will closely monitor developments and adjust its stance as needed to ensure inflation returns to its desired range.

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