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Australia leaves interest rate unchanged at 4.35%

Australia leaves interest rate unchanged at 12-year high of 4.35%
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December 05, 2023 (MLN): Australia's central bank decided to leave its interest rate unchanged at 4.35%, a near 12-year high, the latest data issued by the Reserve Bank of Australia (RBA) showed today.

To note, the central bank had raised its interest rates by 25bps in the last meeting, following a period of four months where it held the rates steady at 4.1%.

This decision reflected the board’s view that progress in bringing inflation back to the target range of 2 to 3% was looking slower than earlier forecast, a press release issued by the RBA said.

While the economy has been experiencing a period of below-trend growth, it was stronger than expected over the first half of the year.

Underlying inflation was higher than expected at the time of the August forecasts, including across a broad range of services.

Conditions in the labour market had eased but remained tight. Housing prices were continuing to rise across the country as was the number of new mortgages.

Given this, the board judged that the risk of inflation remaining higher for longer had risen and an increase in interest rates was therefore warranted to be more assured that inflation would return to target in a reasonable timeframe, it added.

The limited information received on the domestic economy since the November meeting has been broadly in line with expectations.

The monthly CPI indicator for October suggested that inflation is continuing to moderate, driven by the goods sector; the inflation update did not, however, provide much more information on services inflation.

Overall, measures of inflation expectations remain consistent with the inflation target.

Wages growth picked up in the September quarter but this was expected given that it captured the earlier Fair Work Commission decision on award wages.

Wages growth is not expected to increase much further and remains consistent with the inflation target, provided productivity growth picks up.

Conditions in the labor market also continued to ease gradually, although they remain tight.

Higher interest rates are working to establish a more sustainable balance between aggregate supply and demand in the economy.

The impact of the more recent rate rises, including last month's, will continue to flow through the economy.

High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment.

Holding the cash rate steady at this meeting will allow time to assess the impact of the increases in interest rates on demand, inflation, and the labor market.

Returning inflation to target within a reasonable timeframe remains the Board’s priority.

High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality.

And if high inflation were to become entrenched in people’s expectations, it would be much more costly to reduce later, involving even higher interest rates and a larger rise in unemployment.

To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.

There are still significant uncertainties around the outlook.

While there have been encouraging signs on goods inflation abroad, services price inflation has remained persistent and the same could occur in Australia.

There also remains a high level of uncertainty around the outlook for the Chinese economy and the implications of the conflicts abroad. Domestically, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time when the labor market remains tight.

The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers, and higher interest income.

Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.

In making its decisions, the board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labor market.

The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome, it noted.

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Posted on: 2023-12-05T10:26:10+05:00