RBA keeps interest rates on hold, no cut on the horizon

You’ve probably already heard of today’s decision by the RBA Board to keep the official cash rate on hold at 4.35% – not great news for mortgage holders, but great news for anyone with cash in the bank. It was a widely anticipated move (or a non-move, as it were) despite several major global central banks cutting official rates over the last few months (the Fed by 0.5% just last week).

Statement by the Reserve Bank Board: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate target unchanged at 4.35% and the interest rate paid on Exchange Settlement balances unchanged at 4.25%.

Inflation remains above target and is proving persistent.

The outlook remains highly uncertain.

The central forecasts published in August were for underlying inflation to return to the target range of 2–3% late in 2025 and approach the midpoint in 2026. This reflected a judgement that the economy’s capacity to meet demand was somewhat weaker than previously thought, evidenced by the persistence of inflation and ongoing strength in the labour market.

ADDED: Since then, GDP data for the June quarter have confirmed that growth has been weak. Earlier declines in real disposable incomes and the ongoing effect of restrictive financial conditions continue to weigh on consumption, particularly discretionary consumption. However, growth in aggregate consumer demand, which includes spending by temporary residents such as students and tourists, remained more resilient.

Broader indicators suggest that labour market conditions remain tight, despite some signs of gradual easing. Over the three months to August, employment grew on average by 0.3% per month. The unemployment rate remained at 4.2% in August, up from the trough of 3.5% in mid-2023. But the participation rate remains at record highs, vacancies remain elevated and average hours worked have stabilised. Taken together, the latest data do not change the Board’s assessment at the August meeting that policy is currently restrictive and working broadly as anticipated. But there are uncertainties. The central projection is for household consumption growth to pick up in the second half of the year as the headwinds to income growth recede – but there is a risk that this pickup is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market.

There also remains a high level of uncertainty about the outlook abroad. Some central banks have eased policy, although they note that they are removing only some restrictiveness and remain alert to risks on both sides, namely weaker labour markets and stronger inflation. The outlook for the Chinese economy has softened and this has been reflected in commodity prices. Geopolitical uncertainties remain pronounced.

Returning inflation to target is the priority.

While headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high. The most recent projections in the August SMP show that it will be some time yet before inflation is sustainably in the target range. Data since then have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range.

Conclusions

REMOVED: “The economic outlook is uncertain and recent data have demonstrated that the process of returning inflation to target has been slow and bumpy.”

On inflation, which arguably the RBA is more concerned about right now than economic growth, perhaps the key change was the omission of the phase: “high unit labour costs and the persistence of inflation – particularly in the services sector – suggest there are upside risks to inflation.”

If it is the case the RBA feels the economy appears to be on a reasonably firm footing (albeit with continued risks), and given RBA policy remains “restrictive”, and with inflation potentially under greater control…then the possibility of further rate hikes should then now be off the table.

This article first appeared on Market Index on 24 September 2024.