September 05, 2023 (MLN): Reserve Bank of Australia (RBA) decided to leave its key interest rate unchanged at 4.1% and the interest rate paid on Exchange Settlement balances unchanged at 4%, the latest data issued by the RBA showed.
Interest rates have been increased by 4% since May last year. The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so.
In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.
Inflation in Australia has passed its peak and the monthly CPI indicator for July showed a further decline.
But inflation is still too high and will remain so for some time yet. While goods price inflation has eased, the prices of many services are rising briskly. Rent inflation is also elevated.
The central forecast is for CPI inflation to continue to decline and to be back within the 2–3% target range in late 2025.
The Australian economy is experiencing a period of below-trend growth and this is expected to continue for a while.
High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment. Notwithstanding this, conditions in the labor market remain tight, although they have eased a little.
Given that the economy and employment are forecast to grow below trend, the unemployment rate is expected to rise gradually to around 4.5% late next year.
Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up.
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 very 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.
The recent data are consistent with inflation returning to the 2–3% target range over the forecast horizon and with output and employment continuing to grow. Inflation is coming down, the labor market remains strong and the economy is operating at a high level of capacity utilization, although growth has slowed.
There are significant uncertainties around the outlook. Services price inflation has been surprisingly persistent overseas and the same could occur in Australia.
There are also uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages 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.
Globally, there is increased uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market.
Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to 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 household spending, 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.
Copyright Mettis Link News
Posted on: 2023-09-05T09:48:43+05:00
