In its latest monetary policy decision on September 24, 2024, the Reserve Bank of Australia (RBA) decided to keep the cash rate target unchanged at 4.35% and maintained the interest rate on Exchange Settlement balances at 4.25%. The decision comes amid ongoing concerns about inflation, which remains above the RBA’s target despite some easing from its peak in 2022.
Inflation Still Above Target
Inflation has fallen significantly since 2022, driven by higher interest rates designed to cool down the economy and balance supply and demand. However, inflation remains stubbornly above the 2-3% target range. In the June quarter, underlying inflation (trimmed mean) was 3.9%, matching forecasts made in May 2024. Though headline inflation dipped in July, thanks to temporary federal and state cost-of-living relief, the RBA’s projections suggest that inflation won’t sustainably fall within the target range until 2026.
The persistent inflationary pressures reflect broader economic factors, including the strength of the labor market and ongoing demand for goods and services. The RBA acknowledged that despite some progress, inflation has been above the midpoint of the target for 11 consecutive quarters and has only declined marginally over the past year.
Uncertain Economic Outlook
The RBA emphasized the uncertainty surrounding the economic outlook. Central forecasts from August 2024 project that inflation will return to the target range by late 2025, with a sustained decline expected by 2026. However, recent GDP data for the June quarter indicate weak growth, particularly due to declining real disposable incomes and ongoing restrictive financial conditions.
On the labor front, employment grew by 0.3% per month over the three months to August, while the unemployment rate increased to 4.2% in August, up from a low of 3.5% in mid-2023. Despite this, the labor market remains tight, with record-high participation rates and stable average working hours.
The RBA highlighted risks to household consumption. While consumption growth is expected to improve in the second half of 2024, there is a chance that this recovery could be slower than anticipated, which may lead to weaker economic output and potential job losses.
Global and Geopolitical Risks
In addition to domestic concerns, the RBA noted international risks, particularly the outlook for the Chinese economy, which has softened and affected global commodity prices. The RBA also referenced geopolitical uncertainties, which continue to weigh on global economic stability. While some central banks have eased monetary policy, they remain cautious about both weaker labor markets and stronger inflationary pressures.
RBA’s Priority: Returning Inflation to Target
The RBA remains committed to its mandate of price stability and full employment, emphasizing that bringing inflation back to target is its highest priority. The Board pointed out that while headline inflation may temporarily decline due to cost-of-living relief, underlying inflation remains too high and will take time to stabilize within the target range.
Policy Outlook and Future Considerations
The RBA Board is keeping its options open, signaling that it will continue to closely monitor economic data, global financial markets, and developments in the domestic labor market before making further decisions. The central message remains clear: policy will remain restrictive until the Board is confident that inflation is moving toward the target range in a sustainable manner.
In conclusion, the RBA has taken a cautious stance in its latest policy decision, balancing concerns about inflation with the risks of economic slowdown. As global and domestic uncertainties persist, the RBA remains focused on achieving price stability, and further rate hikes or cuts will be determined by future economic data.
Key Takeaways:
- Cash rate remains at 4.35% as inflation remains above target.
- Inflation is projected to sustainably reach the target range by 2026.
- Domestic demand and the labor market remain resilient but face risks.
- Global uncertainties, particularly in China, continue to affect economic outlooks.
- The RBA emphasizes its commitment to returning inflation to the 2-3% range. Outlook for Financial Markets
For investors, the RBA’s decision signals a wait-and-see approach with no immediate changes to the interest rate environment. However, the persistence of inflation could lead to tighter financial conditions if necessary. Market participants should remain cautious and closely follow domestic inflation data and global economic developments as they navigate potential rate adjustments in the coming quarters.
