1. Inflation continues to moderate but remains high: Despite progress in easing inflation in the December quarter, inflation remains high at 4.1 percent. Goods price inflation has decreased, but services price inflation remains high due to excess demand and strong domestic cost pressures.
2. Higher interest rates are working to establish a more sustainable balance: The higher interest rates are gradually easing conditions in the labor market, although they are still tighter than desired for sustained full employment and target inflation. Wages growth has increased, but household consumption growth and dwelling investment remain weak.
3. The outlook is highly uncertain: While there are encouraging signs, the economic outlook remains uncertain. The central forecasts predict inflation to return to the target range in 2025 and to the midpoint in 2026. The outlook for the Chinese economy and conflicts in Ukraine and the Middle East also contribute to the uncertainty.
4. Returning inflation to target is the priority: The Board’s highest priority is returning inflation to the target range of 2-3 percent within a reasonable timeframe. Medium-term inflation expectations have been consistent with the target, and it is important to maintain this consistency.
5. The path of interest rates depends on data and assessment of risks: The Board will closely monitor global economic developments, domestic demand trends, and the outlook for inflation and the labor market.
They are determined to return inflation to target and will take necessary actions, including potential further interest rate increases, based on data and risk assessment.
Key Highlights from the RBA’s Monetary Policy Decision
In its first meeting of 2024, the Reserve Bank of Australia (RBA) has decided to keep the cash rate target unchanged at 4.35 percent, with the interest rate on Exchange Settlement balances also remaining steady at 4.25 percent. This decision comes as inflation, although still above the RBA’s comfort zone, shows signs of moderation.
Inflation Trends and Economic Outlook
- Inflation Moderation: The December quarter saw inflation continue to ease, dropping to 4.1 percent. This decline from the September figure of 5.4 percent marks the fourth consecutive quarter of decreasing annual inflation rates, suggesting that previous rate hikes are beginning to temper demand.
- Goods and Services Price Dynamics: Goods price inflation has fallen below the RBA’s November forecasts, thanks to the resolution of global supply chain disruptions and a moderation in domestic demand. However, services price inflation remains high, reflecting ongoing excess demand and strong domestic cost pressures.
- Labour Market Conditions: The labour market is gradually softening but remains tighter than levels consistent with sustained full employment and inflation targets. Wages growth has increased but is expected to stabilize, provided productivity growth returns to its long-term average.
Monetary Policy and the Path Forward
- Interest Rates Outlook: The RBA’s stance suggests that while interest rates are currently on hold, further adjustments cannot be ruled out. The future path of interest rates will depend on incoming data and the evolving assessment of risks.
- Economic Uncertainties: The economic outlook remains uncertain, with global developments, domestic demand trends, and the Chinese economy’s performance posing potential risks. The RBA is particularly attentive to inflation risks and the impact of monetary policy lags.
- Commitment to Inflation Target: Returning inflation to the target range of 2-3 percent by 2025 is the RBA’s highest priority. The Board emphasizes the importance of medium-term inflation expectations remaining aligned with this target.
The RBA’s decision to maintain the cash rate reflects a cautious approach to navigating the current economic landscape. With inflation showing signs of easing but still above target levels, the RBA is prepared to adjust monetary policy as necessary to ensure inflation returns to its target range in a reasonable timeframe.