RBA keeps cash rate unchanged as inflation settles closer target

Yasmine Raso

Senior Journalist

6 August 2024

The Reserve Bank of Australia (RBA) has left the official cash rate at 4.35 per cent for the seventh consecutive monetary policy decision, after the latest inflation data aligned more with the central bank’s forecasting. 

RBA Governor, Michele Bullock, said while inflation still remains above the midpoint target range of two to three per cent, it had fallen dramatically from its 2022 peak, proving higher interest rates have been working to “bring aggregate demand and supply closer towards balance”.

“In underlying terms, as represented by the trimmed mean, the CPI rose by 3.9 per cent over the year to the June quarter, broadly as forecast in the May Statement on Monetary Policy (SMP). But the latest numbers also demonstrate that inflation is proving persistent. In year-ended terms, underlying inflation has now been above the midpoint of the target for 11 consecutive quarters. And quarterly underlying CPI inflation has fallen very little over the past year,” the Board said in its statement.

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

“The central forecasts set out in the latest SMP [Statement on Monetary Policy] are for inflation to return to the target range of 2–3 per cent late in 2025 and approach the midpoint in 2026. This represents a slightly slower return to target than forecast in May, based on estimates that the gap between aggregate demand and supply in the economy is larger than previously thought.

“In part, this reflects an increase in the forecast for domestic demand. But it also reflects a judgement that the economy’s capacity to meet that demand is somewhat weaker than previously thought, evidenced by the persistence of inflation and ongoing strength in the labour market.”

However, the Board also acknowledge a level of “substantial uncertainty” around the forecasts and overseas outlooks, as the approaches taken by global central banks have varied.

“Revisions to consumption and the saving rate in the most recent National Accounts, high unit labour costs and the persistence of inflation – particularly in the services sector – suggest there are upside risks to inflation. Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth,” the Board said.

“On the other hand, momentum in economic activity has been weak, as evidenced by slow growth in GDP, a rise in the unemployment rate and reports that many businesses are under pressure. And there is a risk that household consumption picks up more slowly than expected, resulting in continued subdued output growth and a noticeable deterioration in the labour market.

“More broadly, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand, and while conditions in the labour market remain tight.

“The outlook for the Chinese economy has softened and this has been reflected in commodity prices. Some central banks have eased policy, although they remain alert to the risk of persistent inflation. Globally, financial markets have been volatile of late and the Australian dollar has depreciated. Geopolitical uncertainties remain elevated, which may have implications for supply chains.

The Board also reiterated its “highest priority” was to bring inflation down towards it target within the most reasonable possible timeframe, and also suggested that it would not rule out any “sufficiently restrictive” policy to achieve this.

“To date, longer-term inflation expectations have been consistent with the inflation target and it is important that this remain the case,” the Board’s statement said.

“Inflation in underlying terms remains too high, and the latest projections show that it will be some time yet before inflation is sustainably in the target range. Data have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out.

“The Board will rely upon the data and the evolving assessment of risks to guide its decisions. In doing so, it will continue to pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

Harvey Bradley, Portfolio Manager at Insight Investment, said the RBA fulfilled market expectations with the rate hold.

“The key data print since the previous meeting was the Q2 CPI print which came in below expectations for the core component. The market had been concerned about the possible need for further hikes – but this inflation print has taken this off the table,” he said.

“​We think this keeps the RBA in a holding pattern for the foreseeable future, likely at least 6 months leaving rates unchanged and they won’t want the market to perceive either a dovish or hawkish bias at this point.

​”This more balanced outlook in the near term is at odds with most other central banks who continue to signal the next move in rates will be down. There has been a significant ‘risk-off’ move in global markets leading up to this RBA meeting. Markets are now pricing in 50bps cuts from US and European central banks in Q4.

​”Australian government bonds have performed well but lagged developed market peers as you would expect in this environment. However we do now think Australian government bonds offer compelling relative value given fewer cuts priced over a 12-18 month time horizon, a higher implied terminal rate than peers and a better fiscal backdrop than peers.”

The RBA Board also released its August 2024 SMP to coincide with this month’s monetary policy decision, echoing the persistence of inflation and the expectation that it will take longer to return it to target.

“Demand in the economy is likely to be high for some time due to underlying inflationary pressures. Headline inflation is expected to come down temporarily due to cost-of-living support, before rising again when that support ends. Headline and underlying inflation are expected to track towards the midpoint of the target in 2026.

“Uncertainties remain. On the one hand, there could be further delays to returning inflation to target if the labour market is tighter than we think or if the pick-up in GDP growth is stronger than we expect. This could cause inflation expectations to increase, leading to further interest rate rises and higher unemployment to bring inflation back to the target.

“On the other hand, the labour market could soften faster or further than forecast if demand turns out to be weaker. This would lead inflation to be lower than we expect.”

It also said that while current economic growth has slowed, this is expected to rise next year.

“The outlook for growth has been upgraded due to stronger-than-forecast public demand as well as a pick-up in household spending as real incomes rise. These factors are expected to be partly offset by stronger growth in imports, and weaker growth in housing construction.”