Board’s Cash rate decision
At a recent meeting, the Board made the decision to raise the cash rate target by 25 basis points, bringing it to 4.35 per cent. Additionally, the interest rate paid on Exchange Settlement balances experienced an increase of 25 basis points, reaching 4.25 per cent.
Rationale
Inflation in Australia has gone beyond its peak but remains too high and more persistent than anticipated a few months ago. The current data on CPI inflation highlights that while the inflation of goods prices has receded, the prices for numerous services continue to surge rapidly. Consequently, the Board determined that an increase in interest rates was essential to guarantee the return of inflation to target within a reasonable timeframe.
Current Inflation Trends
Despite the central forecast expecting CPI inflation to persist in its decline, advancement appears to be slower than previously estimated. The projection for the end of 2024 places CPI inflation at around 3.5 per cent and at the peak of the target range (2 to 3 per cent) by the end of 2025.
State of the Australian Economy
The Australian economy has been experiencing below-trend growth; however, it has demonstrated greater strength than anticipated during the first half of the year. Underlying inflation was higher than expected in August, with increased inflation seen across a broad range of services. Despite the easing of conditions in the labour market, it remains tight, and housing prices are consistently rising across the country.
Nevertheless, high inflation is placing a strain on individuals’ real incomes, leading to weakened household consumption growth and stagnant dwelling investment. As the economy continues to grow below trend, employment is projected to grow at a slower rate than the labour force, with the unemployment rate expected to gradually increase to around 4.25 per cent – a more moderate growth than previously forecasted. Wages growth has improved over the past year but remains in line with the inflation target, assuming an increase in productivity growth.
Forecasts
The Board’s priority is returning inflation to the target range within a reasonable duration. High inflation negatively affects households, businesses, and economic operations, making it crucial to prevent it from becoming entrenched in people’s expectations. At present, medium-term inflation expectations align with the inflation target, and maintaining this consistency is imperative.
Uncertainties surrounding the future outlook still exist, such as the persistence of services price inflation in Australia and overseas, potential lags in the effect of monetary policy, and the response of firms’ pricing decisions and wages to slower economic growth in a tight labour market. The prospects for household consumption are also uncertain, with contrasting financial situations for different households. Moreover, the global outlook, specifically the Chinese economy and international conflicts, contribute to the overall uncertainty.
Whether additional tightening of monetary policy will be necessary to achieve the inflation target depends on forthcoming data and the assessment of risks. The Board remains committed to closely monitoring the global economy, domestic demand, and the outlook for inflation and the labour market, and is determined to return inflation to the target range by taking necessary measures.