Board’s Cash rate decision
The Reserve Bank of Australia’s Board decided to keep the cash rate target and interest rate on Exchange Settlement balances unchanged at 4.35% and 4.25%, respectively. The decision comes after a 25 basis points increase in interest rates last month, which was put in place to address concerns over the slower-than-expected progress in returning inflation to the target range of 2% to 3%.
Rationale
The rate increase last month was deemed necessary due to a stronger-than-expected domestic economy during the first half of the year and higher-than-anticipated inflation across various sectors. Additionally, the labour market remained tight and housing prices continued to rise. As a result, the Board felt it was important to raise interest rates to better ensure that inflation would return to its target range.
Current Inflation Trends
Inflation data since the November meeting has been largely in line with expectations. The monthly Consumer Price Index (CPI) for October indicates that inflation is moderating, driven by the goods sector. However, there is still limited information regarding services inflation, and overall, inflation expectations remain in line with the target. Wages growth is not expected to increase drastically and is consistent with the inflation target, provided productivity growth also accelerates.
State of the Australian Economy
The impact of previous and recent rate increases is still flowing through the economy. High inflation is putting pressure on real incomes and household consumption while also keeping dwelling investment weak. By maintaining the cash rate, the Board can better assess the effects of interest rate increases on demand, inflation, and the labour market.
Forecasts
Returning inflation to the target range remains the Board’s top priority, as high inflation can have damaging effects on the country’s economy. Persistent high inflation could lead to greater income inequality, erosion of savings, and difficulty in business planning and investment. To prevent this, the Board aims to keep medium-term inflation expectations consistent with its target.
Various uncertainties surround the economic outlook, including persistently high services price inflation abroad, the state of the Chinese economy, and potential implications from global conflicts. Domestically, the timing and impact of monetary policy and the response of pricing decisions and wages to slower economic growth are also uncertain. Household consumption is another area of uncertainty, with some consumers struggling while others benefit from rising housing prices, considerable savings, and higher interest incomes.
Whether additional monetary policy tightening is necessary depends on ongoing data and the assessment of risks. The Board will carefully monitor global economic developments, domestic demand trends, and the outlook for inflation and the labour market, remaining determined to bring inflation back to its target range.
