The Reserve Bank of Australia (RBA) has opted to leave the cash rate target unchanged at 4.35 percent and the interest rate paid on Exchange Settlement balances unchanged at 4.25 percent.
The decision was made in a board meeting on Tuesday.
Recent information indicates that inflation has remained high, but is declining more slowly than expected, according to a media statement released by the RBA on Tuesday afternoon.
The CPI grew by 3.6 percent over the year to the March quarter, down from 4.1 percent over the year to December.
“Underlying inflation was higher than headline inflation and declined by less,” the statement said.
“This was due in large part to services inflation, which remains high and is moderating only gradually.
“The RBA said higher interest rates had worked to bring aggregate demand and supply somewhat closer towards balance.”
But the data also indicated continuing excess demand in the economy, coupled with strong domestic cost pressures, both for labour and non-labour inputs.
Conditions in the labour market have eased over the past year, but remain tighter than is consistent with sustained full employment and inflation at target, according to the RBA.
Outlook Remains ‘Highly Uncertain,’ Says RBA
The economic outlook remains uncertain and recent data have demonstrated that the process of returning inflation to target is unlikely to be smooth, according to the RBA.The central forecasts, based on the assumption that the cash rate follows market expectations, are for inflation to return to the target range of 2 to 3 percent in the second half of 2025, and to the midpoint in 2026.
In the near-term, inflation is forecast to be higher because of the recent rise in domestic petrol prices, and higher than expected services price inflation, which is now forecast to decline more slowly over the rest of the year.
Inflation is, however, expected to decline over 2025 and 2026.
“The persistence of services inflation is a key uncertainty,” the statement from the RBA noted.
At the same time, the RBA says household consumption growth has been particularly weak as high inflation and the earlier rises in interest rates have affected real disposable income.
“In response, households have been curbing discretionary spending and maintaining their saving,” the RBA said in its statement.
More broadly, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand, and while the labour market remains tight.
There also remains a high level of uncertainty about the overseas outlook, the RBA says.
Returning Inflation to Target a Priority
Returning inflation to target within a reasonable timeframe remains the board’s highest priority, the RBA said.The board says it needs to be confident that inflation is moving sustainably towards the target range.
“To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case,” the RBA says.
“Recent data indicate that, while inflation is easing, it is doing so more slowly than previously expected and it remains high.”
The board expects that it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks.
The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out.
Struggling in Tight Times, Says Finance Expert
CreditorWatch chief economist Anneke Thompson said she believed that while goods inflation was almost back to a comfortable level, it was services inflation that was proving harder to lower, decreasing just 0.3 percent in the March quarter.“Despite this, the RBA is no doubt well aware that the cash rate has far less impact on services inflation than it does on goods inflation, and thus a further increase would do little to help move services inflation into the band at a faster pace,” she said in a statement.
Ms. Thompson said Australian Bureau of Statistics data had shown that businesses in the discretionary retail, food and drink sectors would bear the brunt of tight fiscal policy as consumers are forced to tighten purse strings.
CreditorWatch’s March 2024 Business Risk Index (BRI) indicates that 8.6 percent and 8.1 percent of invoices issued in the food and beverage services and retail trade sectors, respectively, are now more than 60 days overdue.
“It is likely that the next few months’ employment figures will have a key influence on any future cash rate decision that the RBA makes,” Ms. Thompson said.
“Proponents for further tightening of monetary policy point to sticky services inflation as a key reason to increase the cash rate further, while those that refute this argument highlight falling goods inflation and flatlining retail sales as evidence that monetary policy is tight enough.”
Ms. Thompson said even moderate softening of the employment market could herald the peak of the tightening cycle, with many households and small businesses in “precarious financial positions” given the high cost of debt.
