Australian borrowers will likely have to wait until 2025 before they get any interest rate relief after the Reserve Bank left its cash rate unchanged but said inflation remained too high.
The central bank on Tuesday left its cash rate unchanged at 4.35% for a sixth meeting in a row. The decision was widely expected by economists after June quarter inflation largely met the RBA’s forecasts and market turmoil began spreading around the world.
The RBA said inflation “in underlying terms remains too high, and the latest projections show that it will be some time yet before inflation is sustainably in the target range.
“Data have reinforced the need to remain vigilant to upside risks to inflation and the board is not ruling anything in or out,” it said, maintaining a stance it has had all year.
Inflation was “proving persistent” and the underlying gauge of price increases had “fallen very little over the past year”, it said.
The treasurer, Jim Chalmers, though, said “we are confident we can continue to see inflation moderate, we’re confident that we can continue to grow”.
“But this is a really important warning against complacency,” he added, citing financial market volatility as one reason.
The RBA governor, Michele Bullock, stressed that markets betting on a “near-term” interest rate cut were getting “a little bit ahead of themselves”. A rate rise was a “serious consideration” of the two-day meeting.
“The judgment of the board was that keeping the interest rate where it is and making sure that people understand that a rate cut is not on the agenda in the near term, given what we know that continued pressure will help to keep demand coming back into line with supply,” she said.
The board received briefings on both days about volatile markets, with Bullock saying the steep falls in the wake of US unemployment numbers and other news were “a bit of an overreaction”.
Australia’s economy barely grew in the March quarter even as the population swelled, with the 1.1% annual pace the slowest since the March quarter of 1991, excluding the Covid lockdown era.
The RBA lifted interest rates 13 times over an 18-month period to November last year to ensure high inflation from pandemic government spending, supply disruptions and soaring energy prices after Russia’s invasion of Ukraine did not get entrenched. Those increases have taken their toll on many households, with monthly repayments rising by more than $250 for each $100,000 borrowed.
The Australian dollar rose slightly, to 65.15 US cents from 65 US cents just prior to the RBA decision. Stocks pared some of their modest gains of about 0.5% for the day, as investors viewed the accompanying forecasts as implying interest rates might have to stay higher for longer than thought.
The RBA has said it expected inflation, now at 3.8%, to be back within its 2%-3% target range by the end of 2025, giving it more flexibility than many overseas counterparts. Its updated forecasts brought the headline CPI at least back within the band by this year.
The outlook for the economy was “highly uncertain”.
“Revisions to consumption and the saving rate in the most recent national accounts, high unit labour costs and the persistence of inflation – particularly in the services sector – suggest there are upside risks to inflation,” the RBA said. “Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth.”
In a nod to the financial market turmoil that lopped $160bn off the value of Australian shares over two days before stabilising today, the RBA said: “Globally, financial markets have been volatile of late … and geopolitical uncertainties remain elevated.”
The RBA’s forecasts, contained in its August quarterly statement on monetary policy that informed today’s decision, provide a range of mixed signals about where the bank expects inflation, growth and employment to go, with concerns that the current level of interest rates might not be doing enough to curb inflation.
These estimates were based on market conditions as of 31 July, prior to big falls on global equity markets.
The headline inflation rate would fall within the RBA’s target band, much as Treasury predicted in the May federal budget. The rate, at 3.8% in the June quarter, would ease to 3% by December, lower than the 3.8% pace forecast for then by the RBA in May.
New and extended energy rebates and rental assistance by the federal and state governments would shave about 0.6 percentage points from the headline CPI rate in the September quarter, the RBA said, explaining the revision.
However, the RBA said unwinding of those rebates would push the CPI rate back above the range by the second half of 2025, reaching 3.7% by December. That forecast compared with a 2.8% forecast for inflation by then in the bank’s May predictions.
Importantly, that inflation view assumes there are no further rebates, perhaps unlikely given the Albanese government may well have a pre-election budget to extend them.
The forecasts also include a downward revision of economic growth for the June quarter that just finished to 0.9%, from 1.2% expected in May. However, annual GDP growth should accelerate from now, reaching 1.7% by December this year, 2.6% by June, and remaining near that pace out to the end of 2026.
Households may be better placed to withstand higher interest rates and other cost pressures, though, as the labour market was proving more resilient than expected.
Household disposable income, after deducting for inflation, would start to increase from 1.1% in the June quarter that just ended to 2.6% by the year’s end. That income includes salary as well as any bonuses and other sources of funds such as deposits or dividends.
By June next year, it would be rising at an annual clip of 3%, and range between 2.7% and 3.3% out to the end of 2026.
