The Reserve Bank of Australia (RBA) held the cash rate target steady at 4.35% on Tuesday, as inflation continues to hover above the central bank’s desired 2-3% target range despite a significant decline from its peak in 2022.
The decision aligns with expectations from economists, especially after RBA Governor Michele Bullock stated that a rate cut is unlikely in the near future.
“We are committed to managing inflation, and we believe the current rate reflects that commitment,” Bullock said.
With the United States recently reducing its key interest rate by 50 basis points to a range of 4.75% to 5%, an increase in Australia's rate would diverge from the trend observed among many of its major trading partners. Bullock is likely to face questions about when Australia might follow suit with rate cuts.
In its official statement, the RBA reiterated that combating inflation remains its “highest priority.” “To date, longer-term inflation expectations have been consistent with the inflation target, and it is important that this remains the case,” the statement read.
However, those anticipating early relief from interest rates may be disappointed by the assertion that “it will be some time yet before inflation is sustainably in the target range.”
Recent data shows that underlying inflation, measured at 3.9% over the year to the June quarter, remains elevated, reflecting persistent inflationary pressures.
Although headline inflation dropped in July, further reductions are expected to be temporary, largely due to government cost-of-living relief measures, with current forecasts indicating that inflation may not sustainably return to target levels until 2026.
While wage pressures have lessened, overall labor productivity remains stagnant at 2016 levels. Employment statistics indicate tight labor market conditions, with an average employment growth of 0.3% per month over the three months leading to August, and an unemployment rate holding steady at 4.2%.
The RBA expressed cautious optimism for a rebound in household consumption in the latter half of the year, although risks remain that this growth may materialise more slowly than anticipated.
“The central projection is for household consumption growth to pick up in the second half of the year as the headwinds to income growth recede – but there is a risk that this pickup is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market.”
Internationally, economic uncertainty continues to loom. While some central banks have eased monetary policy, they remain vigilant about potential risks, including weakening labor markets and rising inflation. Additionally, a softened outlook for the Chinese economy has contributed to fluctuations in commodity prices.
Federal Treasurer Jim Chalmers addressed the media in Toowoomba after the RBA decision, saying: “When we came to office, inflation was high and rising and interest rates were rising. Inflation has been coming down quite substantially over the course of the last couple of years, and we haven’t had an interest rate rise for the best part of a year now.”
Shadow Treasurer, Angus Taylor was quick to respond: "The Government is attempting to manipulate headline inflation, and the reserve bank is seeing straight through government manipulation. The government needs to focus on doing the real job, which is to bring core inflation down so that interest rates can come down. So Australians standards of living can be restored to where it should be."
Following the announcement, Bullock spoke with reporters, saying: “Inflation is still above our target and it’s proving to be sticky.”
She added: “Weak productivity growth weighs on growth in the economy’s supply capacity. So compared to a scenario where productivity growth was stronger, weak productivity growth means it takes longer for the gap between demand and supply to close, and therefore longer for inflation to turn to target.”
“We didn’t explicitly consider an interest rate rise at this meeting,” Bullock said.