The Reserve Bank of Australia (RBA) has maintained its interest rate at 4.1 percent for the third consecutive month. However, they have indicated that additional rate hikes might be necessary to keep inflation in check. This decision keeps the cash rate at its highest level since April 2012 and marks the fourth pause in the current cycle of rate increases, which began in May 2022.
Australia’s inflation remains elevated
The decision to maintain the interest rates, which is the final one under the leadership of outgoing governor Philip Lowe, was largely anticipated. In a statement, Lowe mentioned that inflation in Australia has peaked, and the monthly CPI indicator for July showed a further decrease. However, inflation remains elevated and might stay that way for some time.
Consistent with past practice, Lowe kept the door open for potential future rate hikes, stating that there might be a need for additional tightening of monetary policy to ensure that inflation returns to the target range within a reasonable timeframe. While there has been a moderation in the inflation of goods prices, the costs of many services are increasing notably. Rent inflation remains elevated. The central forecast indicates that CPI inflation will continue decreasing and return to the 2-3 percent target range by late 2025.
Australia’s central bank has raised interest rates by 400 basis points from a historic low of 0.1 percent since it commenced this series of increases in May 2022. This monetary tightening has played a role in reducing the annual headline inflation rate, which peaked at 8.4 percent in December, down to 4.9 percent by July.
However, it’s important to note that Australia’s inflation rate remains higher than in many other similarly affluent nations and significantly outside the RBA’s preferred target range of 2-3 percent, which the RBA does not expect to achieve until 2025.
Comparatively, countries like the United States have raised their key interest rates above the RBA’s. For instance, the US Federal Reserve’s primary interest rate ranges from 5.25 to 5.5 percent, despite US consumer inflation registering at 3.2 percent in August.
Nevertheless, economists are increasingly of the opinion that the RBA has implemented sufficient tightening measures, and the next move by incoming governor Michele Bullock could potentially be a rate cut, although not likely until well into 2024. Australia’s relatively high reliance on variable interest rate loans means that rate adjustments, whether increases or cuts, have a more immediate impact than some other countries.
The country’s GDP growth is anticipated to have further slowed in the June quarter, with an annual rate of approximately 1.8 percent, as expected. Economic indicators, including retail spending, show signs of weakening, a trend likely to keep inflation on a downward trajectory, as intended by the RBA.
Following the central bank’s anticipated decision and a lack of noticeable shifts in the bank’s statement, there was little movement among investors. The Australian dollar remained steady at around 64.25 US cents, and stock prices showed minimal change, with a 0.3 percent drop immediately after the RBA announcement.
RBA’s focus on the uncertainties in the economy
Treasurer Jim Chalmers highlighted that the RBA had pointed out uncertainties in the economy, including the “painful squeeze” on household finances and concerns about the Chinese economy due to ongoing issues in the property market. Chalmers acknowledged that higher interest rates were taking a toll on the economy, a situation the government expected to see reflected in the national accounts data released by the Australian Bureau of Statistics (ABS) on Wednesday.
Chalmers also praised outgoing Governor Philip Lowe, whose seven-year term was not extended by the treasurer. He referred to Lowe as leaving the role with the government’s respect and gratitude, emphasizing that Michele Bullock, the incoming RBA governor and the first woman to hold the position, was an exceptional economist and leader with a deep understanding of the RBA.
Stephen Smith, a partner at Deloitte Access Economics, noted that the RBA was becoming increasingly aware of the precarious state of the Australian economy following the series of 12 interest rate hikes. Smith pointed out that household spending had declined in July 2023 compared to the previous year, marking the first such decrease since February 2021. Other indicators like a deteriorating labor market and a slowdown in housing construction further underscored the economic challenges faced by the country.
