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The Reserve Bank of Australia (RBA) has decided to leave the cash rate target unchanged at 4.35 per cent and the interest rate on exchange settlement balances at 4.25 per cent. Despite a substantial decrease in inflation from its peak in 2022, it remains above target and persistent. The trimmed mean consumer price index (CPI) rose by 3.9 per cent over the year to the June quarter, in line with forecasts.
However, underlying inflation has stayed above the midpoint of the 2–3 per cent target range for 11 consecutive quarters, indicating slow progress in curbing inflation.
The economic outlook is highly uncertain. Recent data show that returning inflation to target has been slow and uneven. The latest central forecasts predict inflation will return to the 2–3 per cent target range by late 2025 and approach the midpoint in 2026. This slower-than-expected return is attributed to a larger-than-anticipated gap between aggregate demand and supply, increased domestic demand, and weaker economic capacity, the RBA said in a media release.
Several risks and uncertainties could impact these forecasts. Upside risks to inflation include high unit labour costs, persistent inflation, and revisions to consumption and the saving rate. Although wages growth appears to have peaked, it remains above sustainable levels given trend productivity growth. Conversely, weak economic momentum, as indicated by slow GDP growth, rising unemployment, and business pressures, suggests a risk of slower-than-expected household consumption and deteriorating labour market conditions.
The RBA also highlighted uncertainties regarding the effects of monetary policy, firms' pricing decisions, and wage responses amid slower economic growth and tight labour market conditions. Additionally, the overseas outlook remains uncertain, with a softened outlook for the Chinese economy, volatile global financial markets, and elevated geopolitical risks affecting supply chains.
Returning inflation to target is the RBA's top priority, consistent with its mandate for price stability and full employment. The RBA aims to keep longer-term inflation expectations aligned with the target. The Board remains vigilant to upside inflation risks and emphasises the need for restrictive policy until inflation is sustainably on track toward the target range.
The RBA will continue to rely on data and risk assessments to guide its decisions, closely monitoring global economic developments, domestic demand trends, and the outlook for inflation and the labour market.
Fibre2Fashion News Desk (DP)