Decision to hold rates at 4.35% "supports progress of inflation"
While showing signs of moderation, inflation remains at elevated levels and is not expected to return to the target range until next year, reaching the midpoint by 2026, the Reserve Bank of Australia (RBA) has said.
In its statement on monetary policy issued after deciding to leave the cash rate target unchanged at 4.35%, the RBA board said the move “supports progress of inflation to the midpoint of the 2 to 3% target range within a reasonable timeframe and continued moderate growth in employment.”
“High inflation hurts all Australians,” said the bank board, led by governor Michele Bullock (pictured). “It erodes purchasing power and the value of savings and makes it harder for businesses to plan and invest. It adversely affects all Australians, but particularly those on low incomes. Low and stable inflation, consistent with the inflation target, facilitates strong and sustainable growth in the economy over the longer term.
“The best contribution that monetary policy can make to the wellbeing of the Australian people is to ensure that inflation returns to target in a reasonable timeframe.”
The RBA on Tuesday kept interest rates unchanged at its first meeting of 2024, after 13 increases since May 2022. The decision followed the release of data last week showing inflation at a better-than-expected 4.1%.
The Reserve Bank board acknowledged that it might take some time before inflation is consistently within the target range. It added that the trajectory of interest rates necessary to achieve this objective will hinge on evolving data and risk assessments, with the possibility of further rate increases not being ruled out. It also admitted that the full effect of policy tightening on household consumption is uncertain.
“The squeeze on household finances, including from the increases in interest rates to date, could result in household consumption remaining subdued for longer than expected,” the board said. “This would put more downward pressure on labour demand and wages and see an earlier return to the inflation target than forecast. This could also occur if economic growth among our trading partners is slower than forecast.”
It pointed out that developments in the economy could prolong the time it takes to get inflation to target, and that the longer it takes to return inflation to target, the greater the erosion of the purchasing power of Australian households. There is also the greater risk that inflation and wage expectations drift higher than is consistent with inflation at target.
“History shows that, should this occur, it would require more monetary policy tightening and a costly period of higher unemployment to stabilise inflation expectations and return inflation to target,” the board said.
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