At its meeting today, the Board decided to leave the cash rate target unchanged at 4.35 per cent and the interest rates paid on exchange settlement balances unchanged at 4.25 per cent.
Inflation remains above target and is showing signs of stabilization.: Inflation has fallen significantly since its peak in 2022, as higher interest rates have brought aggregate demand and supply closer to equilibrium. However, inflation remains slightly above the midpoint of the 2-3 per cent target range. In core terms, as reflected by the reduced average, inflation was 3.9 per cent over the year to the second quarter of June, as widely expected in the May Monetary Policy Statement. Headline inflation, as measured by the monthly Consumer Price Index, fell in July.
Headline inflation is expected to ease temporarily, as a result of federal and state cost of living relief. However, our current forecast does not see inflation returning sustainably to target until 2026. At the end of the year, core inflation has been above the target midpoint for 11 consecutive quarters and has fallen very slightly over the past year.
The outlook remains highly uncertain. The central forecast published in August was for core inflation to return to the target range of 2-3 The global economy is expected to grow by 2% in late 2025 and approach the midpoint in 2026. This reflects a judgement that the economy’s ability to meet demand has been somewhat weaker than previously thought, as evidenced by persistent inflation and continued strength in the labor market.
GDP data for the second quarter of the year has since confirmed that growth has been weak. Previous declines in real disposable incomes and the ongoing impact of tight financial conditions continue to weigh on consumption, particularly discretionary consumption. However, growth in aggregate consumer demand.
Labor Market Remains Tight
Wage pressures have eased somewhat, but labor productivity remains at only 2016 levels, despite last year’s rebound. Broader indicators suggest that labor market conditions remain tight, despite some signs of gradual easing. Employment grew at an average rate of 0.3% per month over the three months through August. The unemployment rate remained at 4.2% in August, up from a low of 3.5% in mid-2023. But the participation rate remains at record highs, job openings remain high, and average hours worked have stabilized.
Taken together, the latest data do not change the Fed’s assessment at its August meeting that policy is currently tight and working broadly as expected. But there are some uncertainties. The central expectation is for household consumption growth to recover in the second half of the year as headwinds to income growth ease—but there is a risk that this recovery could be slower than expected, leading to continued weakness in output growth and a sharp deterioration in the labor market. More broadly, there are doubts about the lag in monetary policy and how corporate pricing and wage decisions will respond to slower economic growth at a time of excess demand, while labour market conditions remain tense.
There is also a high level of uncertainty about the outlook abroad. Some central banks have eased policy, although they note that they are only removing some constraints and remain vigilant to risks on both sides, particularly weak labour markets and strong inflation. The outlook for the Chinese economy has dimmed, which is reflected in commodity prices. Geopolitical uncertainty remains.
Returning inflation to target is the priority.
Returning inflation to the target level sustainably within a reasonable timeframe remains the Board’s top priority. This is consistent with the RBA’s mandate of price stability and full employment. To date, longer-term inflation expectations have been consistent with the inflation target and it is important that this remains the case. While headline inflation will decline for some time, core inflation is a more robust indicator of inflation momentum and remains too high.
The latest projections in the August Monetary Policy Report suggest that it will take some time before inflation sustainably reaches the target range. Data since then have reinforced the need to remain vigilant against upside risks to inflation, and the Board is not ruling anything out. Policy will need to be sufficiently restrictive for the Board to be confident that inflation is moving sustainably towards the target range. The Board will continue to rely on data and its evolving assessment of risks to guide its decisions. In this regard, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the inflation outlook and the labour market. The Board remains firm in its determination to return inflation to its target and will do whatever is necessary to achieve this outcome.
Commonwealth Bank Interest Rate Outlook the Commonwealth Bank, Australia’s largest bank, is hopeful that the Reserve Bank of Australia will cut interest rates this year but has pushed its forecast back from November to December. “We expect the cash rate to be left unchanged in the immediate decision,” the economist said. According to Finder’s interest rate survey, all experts expect the RBA to keep rates unchanged at its September meeting. Markets are almost certain of that.
