RBA Unmoved by Latest Inflation Figures, Holds Cash Rate Steady

RBA says current forecasts do not predict inflation returning sustainably to the target midpoint of 2.5 percent until 2026.

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 government rejoicing over the 2.8 percent inflation rate milestone, the Reserve Bank of Australia (RBA) continues to signal caution.

In its latest review on Nov. 5, the RBA decided to keep the cash rate target unchanged at 4.35 percent and the interest rate on Exchange Settlement balances steady at 4.25 percent, indicating concerns over underlying inflationary pressures that persist despite a notable CPI decline.

Internationally, many central banks have eased monetary policies as inflation is stabilising. However, they remain wary of risks to both inflation and labour markets.

The RBA says it remains committed to achieving inflation targets sustainably, viewing this goal as its top priority.

“While headline inflation has dropped, underlying inflation remains concerningly high,” the bank said its post review meeting statement.

It further said it will continue to rely on evolving data to guide its policy decisions, paying close attention to global economic trends, domestic demand, inflation, and labour market conditions.

“The Board remains steadfast in its determination to bring inflation back within target, prioritising stability and economic resilience for Australia’s long-term growth,” it said.

Concerns with Underlying Inflation

The Australian Bureau of Statistics (ABS) recently reported that CPI inflation fell from 3.8 percent in June to 2.8 percent in September, a decline largely attributed to government-backed rebates and lower fuel prices.

However, trimmed mean inflation, excluding volatile prices, remains above the RBA’s target at 3.5 percent, indicating continued inflationary pressures in essential services.

The RBA has acknowledged the decline in inflation since its 2022 peak, attributing it to higher interest rates helping align demand and supply.

However, the central bank’s statement noted that headline inflation at 2.8 percent reflects temporary cost-of-living relief, with underlying inflation persisting.

Current forecasts do not predict inflation returning sustainably to the target midpoint of 2.5 percent until 2026.

Economic Growth, Labour Market, and Wage Pressures

The RBA’s outlook remains cautious, with forecasts suggesting that aggregate demand still exceeds supply capacity.

“Indicators such as business conditions surveys and strong labour market performance support this view. While output growth has been weak, household consumption has shown resilience, supported by temporary residents like students and tourists,” says the RBA statement.

It also notes that the labour market conditions, though easing gradually, remain tight. Record-high participation rates and elevated job vacancies continue to indicate tight market conditions, although recent declines in youth unemployment and underemployment hint at shifting dynamics.

“Despite easing wage pressures, productivity growth has stagnated at 2016 levels, raising concerns over the economy’s long-term growth potential.”

Opposition Criticises Government’s Inflation Strategy

The opposition has criticised the government for failing to curb inflation effectively.

Shadow Treasurer Angus Taylor accused the government of making poor economic choices that have left Australia trailing other nations in managing inflation.

“The treasurer has made all the wrong moves, and our inflation situation is at the wrong end of where we want it to be,” he said.

He highlighted the disparity in interest rates with other countries, pointing out, “Interest rates are coming down in the U.S., the UK, Canada, New Zealand, and elsewhere in Europe, but not in Australia. That’s because our homegrown inflation is raging.”

According to the latest IMF report, Australia is projected to record an inflation rate of 3.6 percent by the end of 2025, with only Slovakia expected to experience higher inflation among advanced economies.

This forecast contrasts sharply with easing inflation in many other countries, underscoring Australia’s unique economic challenges.

Treasurer Jim Chalmers has maintained that Australia is on the right track and that inflation does not always moderate in a straight line.

“What we’ve seen in other countries is that inflation doesn’t always moderate in a perfectly straight line. In fact, in the U.S., their core inflation has gone up, not down, in the most recent data,” he said.

He added that while there may be “zigs and zags” along the way, “the direction of travel is very heartening, particularly the underlying number.”

Chalmers has also cited global economic instability as a major contributor to Australia’s inflation struggles.

He said international pressures are impacting Australia’s economy, pointing to conflicts in the Middle East and Ukraine, alongside economic slowdowns in China and political uncertainty in the United States.

He also said other developed nations fighting inflation had higher unemployment and slower growth.

“In fact, most OECD countries went backwards in the last year, and we haven’t.”