The Reserve Bank of Australia (RBA) has decided to keep interest rates at 4.35% for the eighth consecutive meeting, despite a recent slight drop in inflation.
Headline inflation has fallen to 2.8%, its lowest in almost four years. But the RBA says underlying inflation, at 3.5% in the September quarter, remains too high to make a move in the near future.
In a statement, the bank noted that inflation has “fallen substantially” since its peak in 2022, but warned it could be years before it reaches their 2-3% target range.
The RBA’s latest forecast suggests inflation may not return to the middle of this target range until 2026.
“While headline inflation has declined substantially, underlying inflation is more indicative of inflation momentum, and it remains too high,” the RBA said.
Treasurer Jim Chalmers welcomed the RBA’s decision, saying it showed that Australia was on track to achieve a “soft landing.”
“What this shows is that we’ve been able to fight inflation without ignoring risks to growth,” he said. “We’re confident but not complacent about a soft landing.”
Rates to Remain High, RBA Warns
RBA Governor Michele Bullock said the decision reflects ongoing concerns about inflation, even as some prices ease.
“We do think that there are still some risks on the upside,” she said.
“The underlying inflation we’re experiencing is still around 5% for services. That’s still a significant amount of inflation in the system.”
Governor Bullock also pointed to high demand and a tight labour market, factors which continue to drive prices up.
When asked if households could expect a rate cut in early 2025, Ms Bullock said, “At the moment, we think monetary policy is restrictive, and that’s showing up in parts of demand.”
She added, “We’ll assess the information as it comes through, but we don’t know yet.”
Global Risks Looming
The RBA highlighted global uncertainties, especially around China’s economic outlook and geopolitical tensions. The bank said that while China has introduced stimulus measures, it’s still unclear how effective they will be.
Ms Bullock noted that other countries, including the United States, are now cutting rates, but said that does not mean Australia will follow suit.
“When interest rates come down overseas, as they are, and if and when they start to come down in Australia, they’re not going back to where they were during COVID,” she said.
“That was emergency settings,” she added, suggesting that future rate cuts would be more limited.
The RBA said it will continue to monitor the global and domestic economic landscape to guide its decisions.
