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Statement by Michele Bullock, Governor: Monetary Policy Announcement

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During  the meeting, the Board made the decision to maintain the cash rate target at 4.10 percent and keep the interest rate paid on Exchange Settlement balances unchanged at 4.00 percent.

Over the past year, interest rates have increased by a total of 4 percentage points. These higher rates have been effective in rebalancing the economy’s supply and demand dynamics and will continue to do so. In light of this progress and the prevailing economic uncertainty, the Board has chosen to keep interest rates steady this month. This pause will provide additional time to assess the impact of the previous interest rate hikes and to better understand the economic outlook.

In Australia, inflation has already peaked but remains elevated and is expected to stay that way for a while. Recent indicators suggest that the inflation rate for goods has moderated, but prices for many services are still rising briskly, along with notable increases in fuel and rent prices. Although the central forecast anticipates a gradual decline, it is expected that Consumer Price Index (CPI) inflation will return to the 2–3 percent target range by late 2025.

The Australian economy displayed slightly stronger growth than anticipated in the first half of the year. However, it is still operating below its long-term growth trend and is expected to continue doing so for some time. High inflation is putting pressure on real incomes, resulting in weak household consumption and dwelling investment. Despite these challenges, labor market conditions remain tight, albeit with some easing. Considering the forecasted below-trend growth in the economy and employment, the unemployment rate is expected to gradually increase to approximately 4.5 percent by late next year. While wages have increased over the past year, they remain consistent with the inflation target, provided there is an uptick in productivity growth.

The Board’s top priority remains returning inflation to the target range within a reasonable timeframe. High inflation negatively impacts individuals’ lives, disrupts economic functioning, erodes savings, strains household budgets, hinders business planning and investments, and exacerbates income inequality. Moreover, if high inflation becomes ingrained in people’s expectations, it becomes significantly costlier to address later, potentially necessitating even higher interest rates and a more substantial rise in unemployment. So far, medium-term inflation expectations have aligned with the inflation target, and it is vital to maintain this alignment.

Recent data support the expectation that inflation will gradually return to the 2–3 percent target range in the forecasted period, with continued growth in output and employment. Inflation is on a downward trajectory, the labor market remains robust, and the economy is operating at a high level of capacity utilization, despite slower growth.

However, there are substantial uncertainties surrounding the outlook. Overseas, service price inflation has proven unexpectedly persistent, and similar trends could emerge in Australia. Uncertainties also exist concerning the timing of monetary policy effects and how firms adjust their pricing and wages amidst slower economic growth while the labor market remains tight. The outlook for household consumption remains uncertain, with many households facing financial constraints, although some benefit from rising housing prices, substantial savings, and higher interest income. On a global scale, uncertainty persists regarding the Chinese economy due to ongoing challenges in the property market.

While there may be a need for some further tightening of monetary policy to ensure inflation returns to target within a reasonable timeframe, this decision will continue to hinge on the evolving data and risk assessments. The Board remains attentive to global economic developments, household spending trends, and the inflation and labor market outlook in its decision-making process. The Board remains steadfast in its commitment to bringing inflation back to the target range and will take necessary actions to achieve this goal.

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