RBA Sticks to Its Guns: Interest Rates Unchanged Amidst Political Pressure

RBA says inflation has significantly decreased since its 2022 peak, thanks to higher interest rates that have aligned aggregate demand and supply.

A man walks past the Reserve Bank of Australia in the central business district of Sydney on June 7, 2022. - Australia's central bank raised interest rates by a higher-than-expected half percentage point on June 7 and warned of more increases, trying to rein in "significantly" increased inflation. (Photo by Muhammad FAROOQ / AFP) Photo by MUHAMMAD FAROOQ/AFP via Getty Images

Despite immense political pressure to cut interest rates, the Reserve Bank of Australia (RBA) did not budge.

The Board announced on Sept. 24 that it decided 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.

“Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. However, inflation is still some way above the midpoint of the 2–3 percent target range,” read the statement issued by the Board.

It added that while headline inflation is expected to fall temporarily due to federal and state cost-of-living relief, the RBA’s current forecasts do not see inflation returning sustainably to target until 2026.

Other Nations Are Slashing Rates

On Sept. 18, the U.S. Federal Reserve announced its decision to cut interest rates by half a percentage point. Following a two-day meeting in Washington, the Federal Open Market Committee decided to lower its key lending rate to between 4.75 and 5 percent.

In addition to the United States, around 10 key central banks, including those in Canada, the UK, the EU, and New Zealand, have been reducing their official interest rates since last year.

Without directly mentioning the nations, the Board observed that while some central banks have eased their policies, they are still cautious. They are not fully relaxing restrictions and are aware of risks from weaker labour markets and rising inflation.

“The outlook for the Chinese economy has softened, which has been reflected in commodity prices,” it said.

The RBA remains committed to continuing with a sufficiently restrictive policy until it is confident that inflation is moving sustainably towards the target range.

“The Board will continue to rely upon the data and the evolving assessment of risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market,” it said.

It concluded by stating that it is resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.

On Sept. 23, Greens economic spokesman Nick McKim called for Treasurer Jim Chalmers to use the government’s reserve powers to enforce a reduction if the RBA Board does not cut rates.

While the government dismissed this claim, Chalmers previously criticised the RBA for damaging the economy with higher interest rates.

Weak Economic Growth Amidst Tight Labour Market

The Board also highlighted that recent GDP data for the June quarter indicate weak economic growth, influenced by earlier declines in real disposable incomes and restrictive financial conditions that have dampened discretionary spending.

Conversely, aggregate consumer demand, buoyed by spending from temporary residents like students and tourists, showed resilience.

“While wage pressures have eased, labour productivity remains stagnant at 2016 levels. Labour market indicators suggest a tight environment, with employment growing by an average of 0.3 percent monthly,” the Board noted.

“The unemployment rate stands at 4.2 percent, up from 3.5 percent in mid-2023, yet participation rates are at record highs, and job vacancies remain elevated.”