RBA posts rate hold after headline inflation settles within target

The Reserve Bank of Australia (RBA) has once again kept the official cash rate at 4.35 per cent, where it has sat for almost 12 months, after the latest Consumer Price Index (CPI) figures for the September quarter proved promising.

The RBA Board re-affirmed that while headline inflation came down to 2.8 per cent from 3.8 per cent in the 12 months to the June quarter, underlying inflation remained well above the central bank’s target at 3.5 per cent.

“The forecasts published in today’s Statement on Monetary Policy (SMP) do not see inflation returning sustainably to the midpoint of the target until 2026,” the statement from the Board said.

“The forecasts published today are very similar to those published in August. The forecast path for underlying inflation reflects a judgement that aggregate demand remains above the economy’s supply capacity, evidenced by the persistence of underlying inflation, surveys of business conditions and ongoing strength in the labour market.

“Growth in output has been weak. Past declines in real disposable incomes and the ongoing effect of restrictive financial conditions continue to weigh on household consumption, particularly discretionary consumption. However, growth in aggregate consumer demand, which includes spending by temporary residents such as students and tourists, has remained more resilient.

“A range of indicators suggest that labour market conditions remain tight, and while conditions have been easing gradually, some indicators have recently stabilised. Employment grew strongly over the three months to September, by an average of 0.4 per cent per month. The unemployment rate was 4.1 per cent in September, up from the trough of 3.5 per cent in late 2022. But the participation rate remains at record highs, vacancies are still elevated and average hours worked have stabilised. At the same time, some cyclical measures of the labour market including youth unemployment and underemployment have recently declined.

“Wage pressures have eased somewhat but labour productivity is still only at 2016 levels, despite the pick-up over the past year.”

The Board also noted that while its monetary policy decisions are now “working broadly as anticipated”, a significant amount of uncertainty still remains. The RBA also responded to perceptions that their decisions are “currently restrictive” when compared to the recent moves made by other central banks to ease their monetary policies, choosing to continue being alert while “geopolitical uncertainties remain pronounced”.

“The central projection is for growth in household consumption to increase from the second half of this year as income growth picks up – and there is tentative evidence of an increase in spending in the September quarter. But there is a risk that any pick-up is slower than expected, resulting in continued subdued output growth and a sharper 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 slow growth in the economy and weak productivity outcomes at a time of excess demand, and while conditions in the labour market remain tight.

“There remains a high level of uncertainty about the outlook abroad. Most central banks have eased monetary policy as they become more confident that inflation is moving sustainably back towards their respective targets.

“They note, however, that they are removing only some restrictiveness and remain alert to risks on both sides, namely weaker labour markets and stronger inflation. Public authorities in China have responded to the weak outlook for economic activity by implementing more expansionary policies, although the impact (and in some cases the specific details) of these measures remains to be seen.”

The RBA confirmed it will “not rule anything in or out” as it prioritises vigilance to manage inflation risk and return underlying inflation “sustainably” to the target range.

“Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range. The Board will continue to rely upon the data and the evolving assessment of risks to guide its decisions. In doing so, it will 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.”

“While the outcomes of today’s Melbourne Cup and this week’s US presidential elections are in fierce contention, the market is more or less unanimous on the RBA holding the cash rate this afternoon at 4.35%,” VanEck Head of Investments & Capital Markets, Russel Chesler, said.

“The Australian economy has proven remarkably resilient to downward pressure, however we’re encouraged to see the slow-yet-steady progress in bringing down the inflation rate. Last week’s quarterly inflation print showed that the trimmed mean annual inflation rate had fallen from 4% p.a. in the previous quarter to 3.5% p.a.  in the most recent quarter. This is still well outside the RBA’s target range of 2% to 3%, pushing back any cuts to well into 2025.

“The labour market remains robust, with unemployment still at 4.1% in September. Seek job ads rose by 0.5% in September, making it the third consecutive month of rising vacancies. There is no doubt that the job market continues to be hot, which is keeping services inflation high. Unless we see a significant fall in wage inflation from the current level of 4.1%, further falls in inflation will be impeded. We will know more when the third quarter wage inflation numbers are released next Wednesday (13 November 2024).

“We are on a very different path to the US, which is expected to cut rates by another 25pbs on Friday. Our rate increases started a few months later and were not as steep. Even after the expected 25bps rate cut, their federal funds rate will still be around 4.6%, which is well above the current RBA official cash rate. It is going take longer for the rate increases to unwind here in Australia, however the narrowing interest rate differential between Australian and US may prove positive for the AUD.”