The cash rate target remains at 4.35% following yesterday’s Reserve Bank Monetary Policy Board meeting. Despite recent news deadlines surrounding the ‘surprise’ inflation data, the Board has decided to maintain a neutral monetary stance to keep rates on hold.
Inflation is still declining at the moment but less quickly than forecast. In its media release statement, the Board emphasised that the economic outlook is uncertain.
This theme was continued in Governor Bullock’s media press conference.
“We have rates at the right level to return inflation to the target range next year but [this] will take time .. the path will likely continue to be bumpy and we should all be prepared for that.“
Governor Michele Bullock
Inflation in the near future is expected to be driven by petrol prices which will elevate overall prices in the next six months “before coming back down again”.
Inflation returning to target remains the RBA’s “highest priority”, and to date “medium-term inflation expectations have been consistent with the inflation target”.
So what were the deliberations in coming to the “rate hold” decision?
Governor revealed that the Board did discuss the option of raising interest rates. It discussed the option of keeping interest rates where they were. But on balance, the Board felt that at the moment staying where they are was appropriate.
In its statement, theses were some of the considerations:
- The Consumer Price Index over the 12 months to March 2024 was 3.6%. This is lower compared to the 12 months to December at 4.1%, but unfortunately it is falling slower than expected.
The RBA’s forecasts are for inflation to be within 2-3% in late 2025, and at the mid-point by 2026.
- The economy is achieving a better demand and supply balance, but the labour market conditions remain inconsistent with the dual goal of sustained full employment and inflation at target.
The central bank’s tone has changed to be more pessimistic regarding wages growth, which is “still above the level that can be sustained given trend productivity growth”.
- There are many ongoing uncertainties with the return to target inflation “unlikely to be smooth”. Services inflation remains persistent, affected by the strong labour market, and growth in unit labour costs.
- Meanwhile, household consumption is weak, with falls in real disposable income, and households curbing discretionary spending.
- There are also global uncertainties such as in Ukraine and the Middle East, despite the improved outlook in the US and China.
The Board is conscious of the impact of higher inflation and interest rates
At the start of the media conference, Governor made it clear that the Board and herself are very conscious of the impact of higher interest rates and inflation on Australians:
“The experiences of Australian households are extremely varied. On the one hand .. some people are managing to save despite higher inflation and interest rates. In fact some of those with mortgages are still making extra payments into offset and redraw accounts on top of their required payments. But on the other hand .. there are households who are really struggling to make ends meet. These people don’t have a lot of extra savings. They might be working a second job, cutting back on discretionary items or making difficult decisions such as putting off medical appointments. These people are doing it very tough and the Board and I are very conscious of that.“
Getting inflation down, however, is in the central bank’s mandate which must be upheld. Bullock said, “.. interest rates impact Australia very quickly because of our [relatively] high share of variable rate mortgages. We’re very conscious that we have a dual mandate. We’ve got to get inflation down and if we don’t …it ultimately isn’t good for employment. But we are trying very hard to get it down while maintaining employment growth and that’s the balance where we’re choosing.”
Impact of immigration on inflation
Interestingly, Governor Bullock touched on the impact of immigration on inflation and the housing market in her media conference.
She said that the impact is not actually that straight forward. While acknowledging that migrants add to the demand and pressure on the housing market, they’ve also added to labour supply. She recalls how often she heard from businesses how hard it was to find staff during the pandemic. Even as the country was coming out of the [pandenic and border closure] circumstances, the labour market was still tight, and so that added to the supply side of the economy as well.
The central bank’s judgement is that immigration hasn’t really added dramatically to inflation with the exception that it’s put big pressure on the housing market and hence in rents. Otherwise, it is “pretty much of a muchness”.
Next week (14 May), the Federal Treasurer Jim Chalmers will be delivery the budget. It has been made clear that this budget will focus on cost of living pressures, left right and centre. Fiscal relief may again put pressure on inflation. It is a delicate balancing act, so we’re watching this space closely.
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