The Reserve Bank of Australia(RBA) has chosen not to alter the cash rate, keeping it steady at 4.10% in August for the second consecutive month. Over the past year since May, interest rates have risen significantly by four percentage points to achieve a stable equilibrium between supply and demand within the economy.
Given the uncertainties surrounding the current economic outlook, Governor Philip Lowe of the RBA stated that the Board has decided to maintain the interest rates for this month. This decision, he says, will allow them more time to assess the impacts of the recent rate increase and better understand the economic future ahead.
RBA highlights that inflation has gone down
In Australia, inflation has been declining, but it remains at a relatively high level of 6 percent. While the inflation rate for goods has eased, the costs of services and rent are experiencing significant increases. The central prediction indicates that CPI inflation is expected to decrease further, reaching approximately 3.25 percent by the end of 2024 and eventually returning to the target range of 2-3 percent by late 2025.
The Australian economy is currently going through a phase of below-trend growth, and this trend is expected to persist. Weak household consumption and dwelling investment are contributing factors, leading to a forecasted GDP growth of about 1.75 percent in 2024, slightly increasing to just above 2 percent the following year.
Regarding the labor market, the situation is relatively tight but has shown some improvement. Unemployment is predicted to rise to around 4.5 percent by late next year, while wage growth has been responsive to the tightening labor conditions.
The released statement emphasized that further tightening monetary policy may be necessary to bring inflation to the target, but this decision would depend on data analysis and risk assessment.
Before the recent decision, there were differing opinions among traders and commentators about the potential outcome. The futures interest rate market had a probability of less than 20% for a 25 basis point hike, while another survey of economists showed 18 in favor of a rate increase and 12 expecting no change.
Now, the market has assigned a probability of around 50% for a 25 basis point hike for the rest of the tightening cycle. The statement also acknowledged that inflation in Australia is on a downward trend but remains high at 6 percent.
In the June quarter, the headline CPI came in at 0.8%, below the expected 1.0% and lower than the previous 1.4%. The RBA’s preferred measure of trimmed-mean CPI was 5.9% year-on-year by the end of June, falling short of the estimated 6.0% and the previous 6.6%. Additionally, the trimmed mean quarter-on-quarter CPI reading of 1.0% was below the forecasted 1.1% and the previous 1.2% for Q1.
RBA to release updated economic forecasts
The latest RBA decision was made shortly after Michelle Bullock’s appointment as the new RBA Governor just over two weeks ago. She is set to assume her new position in mid-September. Ms. Bullock has been the bank’s Deputy Governor since April 2022 and has been associated with the institution since 1985. She is well-regarded as a leading economist in her own right. The appointment is generally seen as a smooth leadership transition during a crucial time for monetary policy at the RBA.
In today’s economic news, the Australian building approvals data for June showed a decline of -7.7% month-on-month, which was not as severe as the anticipated -8.0% and the previous -8.1%. Moreover, the current unemployment rate is 3.5%, reaching near multi-generational lows. The accompanying statement mentioned the tight labor market and the RBA believes that the unemployment rate will need to increase to around 4.5% to bring the CPI back down below 3%.
Moving forward, the bank has emphasized that incoming data will play a crucial role in assessing the impact of the 400 basis points increase in borrowing costs since May of the previous year. As a result, there might be higher volatility surrounding economic data than in recent cases in the Australian financial markets.
The RBA is set to release updated economic forecasts on Friday, although the statement indicates that its outlook remains largely unchanged. Abhijit Surya, an economist at Capital Economics, believes that unless there are any unforeseen inflationary shocks, there is a good chance that the RBA has completed its tightening phase. He doesn’t expect an easing cycle to begin anytime soon and doesn’t foresee any rate cuts until at least Q2 2024.
