The Reserve Bank of Australia (RBA) has chosen to keep its official cash rate unchanged at 4.1% for the third consecutive month. This decision comes as the RBA carefully evaluates whether the recent significant increase in borrowing costs, the sharpest in three decades, has been effective in curbing inflation.
During its September board meeting on Tuesday, the RBA maintained the cash rate at its current level, which stands as the highest since mid-2012. This decision was widely anticipated, especially considering it marks the final decision under the leadership of outgoing Governor Philip Lowe.
Lowe remarked in a statement accompanying the decision, “Inflation in Australia has already passed its peak, and the monthly CPI indicator for July indicated a further decline. However, inflation still remains above target and is expected to persist at elevated levels for some time.”
As per the usual practice, Lowe didn’t rule out the possibility of future rate hikes if necessary, stating, “Further tightening of monetary policy may be necessary to ensure a return to the target inflation rate within a reasonable timeframe, contingent upon data and evolving risk assessments.”
While the inflation rate for goods has eased, prices for many services continue to rise briskly, with rent inflation remaining elevated. The central forecast indicates that CPI inflation will continue to decline, eventually returning to the target range of 2-3% by late 2025.
Since May 2022, the central bank has raised interest rates by 400 basis points from a historic low of 0.1%. This monetary tightening has contributed to lowering the annual headline inflation rate from its peak of 8.4% in December to 4.9% by July.
Australia’s inflation rate, however, remains higher compared to many other similarly wealthy nations and remains outside the RBA’s preferred target range of 2-3%. This target is not expected to be achieved until 2025.
Notably, countries like the United States have also increased their key interest rates beyond those set by the RBA. For instance, the US Federal Reserve’s primary interest rate is currently at 5.25-5.5%, despite consumer inflation in the US running at 3.2% in August.
Economists are increasingly of the opinion that the RBA has taken sufficient action, with the next move by incoming Governor Michele Bullock likely to be a rate cut, possibly not until well into 2024. Australia’s reliance on variable interest rate loans means that changes in rates have a more immediate impact compared to other countries.
The country’s GDP growth is anticipated to have further slowed in the June quarter, reaching approximately 1.8% on an annual basis. Economic indicators, including retail spending, are showing signs of weakening, aligning with the RBA’s intended impact on inflation.
Investors did not show significant reactions to the RBA’s expected decision, with the Australian dollar remaining steady at around 64.25 US cents, and stocks also experiencing minimal change with a 0.3% drop immediately following the announcement.
Treasurer Jim Chalmers acknowledged the RBA’s recognition of economic uncertainties, such as the strain on household finances and concerns about the Chinese economy due to ongoing property market stresses. Chalmers also commented on the toll higher interest rates are taking on the economy, which is expected to be reflected in the national accounts data release by the Australian Bureau of Statistics.
Chalmers paid tribute to Governor Lowe, whose seven-year term he chose not to extend, expressing the government’s respect and gratitude for his service. He also praised Lowe’s successor, Michele Bullock, as an outstanding economist and leader with a deep understanding of the RBA.
Michele O’Neil, President of the ACTU, viewed Lowe’s departure as an opportunity for the central bank to change its course and prioritize full employment while addressing the impact of excessive corporate profits on inflation to restore public confidence in the RBA.
Stephen Smith, a partner at Deloitte Access Economics, emphasized that the RBA is increasingly recognizing the fragile state of the Australian economy following the twelve consecutive rate hikes. Lower household spending, a deteriorating labor market, and declining housing construction further underscore the economy’s current weakness.