For a second straight month, the Reserve Bank of Australia has decided to keep interest rates steady, giving borrowers hope that the tightening cycle has reached its end.
At its August board meeting on Tuesday, the RBA kept the official cash rate at 4.1% – where it’s remained since June – as inflation continues to track lower and household spending slows.
RBA governor Philip Lowe said in a post-meeting statement, “The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so.”
“In light of this and the uncertainty surrounding the economic outlook, the board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.”
At its meeting today, the Board decided to leave the cash rate target unchanged at 4.10 per cent and the interest rate paid on Exchange Settlement balances unchanged at 4.00 per cent.
Interest rates have increased by 4 percentage points since May last year. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.
Inflation in Australia is declining
Inflation is currently at 6 per cent. Goods price inflation has eased, but the prices of many services are rising briskly. Rent inflation is also elevated. The central forecast is for CPI inflation to continue to decline, to be around 3¼ per cent by the end of 2024 and to be back within the 2–3 per cent target range in late 2025.
The Australian economy is experiencing a period of below-trend growth and this is expected to continue for a while. Household consumption growth is weak, as is dwelling investment. The central forecast is for GDP growth of around 1¾ per cent over 2024 and a little above 2 per cent over the following year.
Conditions in the labour market remain very tight, although they have eased a little. Job vacancies and advertisements are still at very high levels, although firms report that labour shortages have lessened. With the economy and employment forecast to grow below trend, the unemployment rate is expected to rise gradually from its current rate of 3½ per cent to around 4½ per cent late next year. Wages growth has picked up in response to the tight labour market and high inflation. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up.
Returning inflation to target within a reasonable timeframe remains the Board’s priority. High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality.
And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.
Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks. In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.
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