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The Reserve Bank of Australia (RBA) has announced another hold in the cash rate, leaving it at 4.35 per cent.
Following the decision, the board’s statement read: “Sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority.”
This is consistent with the RBA’s mandate for 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.
The RBA noted that despite headline inflation declining substantially and “will remain lower for a time”, underlying inflation is “more indicative of inflation momentum, and it remains too high”.
The November SMP forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint. This reinforces the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out.
Interestingly, the RBA has changed its language in this month’s statement, which read that policy will “need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range”.
The Melbourne Cup Day monetary policy meeting in 2023 marked the last time the RBA hiked interest rates, going up from 4.1 per cent to 4.35 per cent. The cash rate has remained at this setting for 12 months, and will likely remain there until the February meeting in 2025 at the earliest.
A hold was widely anticipated by the market, economists, and the industry despite the latest Consumer Price Index (CPI) data for the September quarter showing annual inflation had dropped into the RBA’s target band of 2-3 per cent, dropping to 2.8 per cent from 3.8 per cent in the previous quarter.
The November statement revealed that the RBA had expected this due to declines in fuel and electricity prices over the quarter, but part of the decline “reflects temporary cost of living relief”.
“Abstracting from these effects, underlying inflation (as represented by the trimmed mean) was 3.5 per cent over the year to the September quarter. This was as forecast but is still some way from the 2.5 per cent midpoint of the inflation target,” the board stated.
While headline inflation fell within the target range, underlying inflation is “still higher than the RBA would like, and it’s looking like borrowers will have to stay patient.”
Although other western countries (New Zealand, the US, etc.) have begun cutting their cash rates, Australia’s still remains lower with stronger employment.
While the mood for a rate cut is intensifying, it seems more likely the RBA may keep mortgage holders waiting until next year.
Major banks have been cutting their fixed rates, but these could still end up being higher than variable rates in the longer term.
This outcome was the one “most favoured” by economists and likely reflected the inflation forecast of 0.8 per cent q/q trimmed mean for 3Q24.
This “just allows the RBA board to claim continuing progress toward the 2.5 per cent inflation target” it’s trying to achieve by the second half of 2026.
On hold rates will likely not be welcomed by those struggling under high interest rates and high cost of living, however, the board has been clear that Australian interest rates will remain high until it has greater confidence that inflation will return to target.
Economists expect the RBA will be satisfied enough that underlying inflation has been brought under control to reduce rates in the first quarter of 2025.
I am concerned, however, that banks will find reasons to not pass on the reduction in full, which will not help ease the pain for borrowers doing it tough on higher rates, meaning borrowers will need to consider all options.
