At its meeting today, the Reserve Bank decided to keep the cash rate target at 4.35% and the interest rate on Exchange Settlement balances at 4.25%.
Inflation is still high and not going down as fast as hoped.
Inflation has dropped a lot since its peak in 2022, thanks to higher interest rates helping balance demand and supply. But recently, the drop has slowed, and inflation is still above the target of 2-3%. In the year to April, the monthly CPI indicator rose by 3.6% overall and by 4.1% without counting volatile items and holiday travel, similar to December 2023.
There’s still too much demand in the economy, causing high costs for both labour and other inputs. The labour market has eased a bit but is still tighter than needed for full employment and target inflation. Wages growth seems to have peaked but is still too high for the current productivity growth. Recent data revisions show that consumption was stronger than previously thought. However, output growth is slow, and consumption per person is declining as households cut back on spending due to inflation affecting real incomes.
The future is highly uncertain.
The economic outlook is uncertain, and recent data show that getting inflation back to target won’t be easy.
The forecasts from May predicted that inflation would return to the 2-3% target range by the second half of 2025 and to the midpoint by 2026. Since then, signs of weak economic activity have emerged, such as slow GDP growth, a rising unemployment rate, and slower wages growth. However, revisions to consumption and the saving rate, along with persistent inflation, suggest there are still risks. Recent budget outcomes may affect demand, but federal and state energy rebates will temporarily lower headline inflation. The ongoing rise in service prices is a big uncertainty. Although growth in unit labour costs has slowed, it’s still high. Productivity needs to improve for inflation to keep declining.
There is uncertainty around consumption growth. Real disposable incomes have stabilised and are expected to grow later in the year, helped by lower inflation and tax cuts. An increase in wealth from rising housing prices is also expected to support consumption growth next year. But there’s a risk that household consumption may grow more slowly than expected, leading to slow output growth and a worse labour market.
There are also uncertainties about how monetary policy affects the economy and how firms’ pricing and wages will react to slower economic growth and tight labour market conditions.
There’s a lot of uncertainty about the global outlook too. Output growth in most advanced economies seems to have bottomed out. There have been improvements in the outlook for the Chinese and US economies, and many commodity prices have risen. Some central banks have eased policies but remain cautious about persistent inflation. Geopolitical uncertainties, like the conflicts in the Middle East and Ukraine, are still high and could affect supply chains.
Returning inflation to target is the priority.
The Reserve Bank’s top priority is to bring inflation back to target within a reasonable time. This is in line with the RBA’s mandate for price stability and full employment. The Reserve Bank needs to be sure that inflation is moving towards the target range. So far, medium-term inflation expectations have matched the inflation target, and it’s important that this continues.
Inflation is decreasing but slower than expected and remains high. The Reserve Bank expects it will take some time for inflation to be sustainably in the target range. Recent data have been mixed but show the need to be alert to inflation risks. The path for interest rates to bring inflation to target is uncertain, and the Reserve Bank is keeping all options open. They will rely on data and evolving risk assessments, paying close attention to the global economy, domestic demand trends, and the outlook for inflation and the labour market. The Reserve Bank is determined to bring inflation back to target and will take necessary actions to achieve this.
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