The Reserve Bank of Australia has extended its interest rates pause for a third consecutive month as it assesses whether the sharpest increase in borrowing costs in three decades has done enough to slay inflation.
The RBA left its cash rate on hold at 4.1%, the highest since mid-2012, at its September board meeting on Tuesday. The decision, the last under the leadership of outgoing governor Philip Lowe, was widely expected.
“Inflation in Australia has passed its peak and the monthly CPI indicator for July showed a further decline,” Lowe said in an accompanying statement. “But inflation is still too high and will remain so for some time yet.”
As has been customary, Lowe left open the possibility of further rate increases if needed: “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks”.
While goods price inflation has eased, the prices of many services are rising briskly. Rent inflation is also elevated. The central forecast is for CPI inflation to continue to decline and to be back within the 2%–3% target range in late 2025.
The central bank has hoisted interest rates by 400 basis points from a record low 0.1% rate since it began increases in May 2022. The tightening of monetary policy has helped reduce the headline inflation rate from a December peak annual rate of 8.4% to 4.9% by July.
Australia’s inflation rate, though, remains higher than in many similarly rich nations and also far outside the RBA’s preferred target band of 2%-3% that it expects won’t be reached until 2025.
Nations such as the US have also pushed their key interest rates higher than the RBA. The US’s federal reserve main interest rate is at 5.25%-5.5%, for instance, even with US consumer inflation running at 3.2% in August.
Still, economists are increasingly convinced the RBA has done enough, with the next rates move by incoming governor Michele Bullock likely to be a cut but perhaps not until well into 2024. Australia’s relative reliance on variable interest rate loans means increases or cuts have a more immediate impact than elsewhere.
The country’s GDP growth is expected to have slowed further in the June quarter – to about 1.8% on an annual basis – when the Australian Bureau of Statistics releases the national accounts data on Wednesday.
Economic indicators, such as retail spending, are turning weaker, a trend likely to keep inflation on the slide as the RBA intended.
With the central bank’s decision as expected and no obvious shifts in language in the bank’s statement, investors were also little moved. The Australian dollar remained hovering at about 64.25 US cents, and stocks were also little changed at their 0.3% drop for the day in the immediate aftermath of the RBA verdict.
More to come.