RBA holds rates as inflationary pressures persist

5th Nov 2024 09:08

(Sharecast News) - The Reserve Bank of Australia (RBA) held its cash rate steady at 4.35% for an eighth consecutive meeting on Tuesday, maintaining restrictive monetary policy as it continued to battle persistently high inflation.

Its decision, widely expected by economists, came after inflation stood at 3.5% in the September quarter, above the central bank's 2% to 3% target range.

While headline inflation had dropped to 2.8% - its lowest level in more than three years - core inflation, which excludes volatile items, remained elevated.

RBA governor Michele Bullock emphasised that inflation's recent decline partially reflected temporary factors, and that underlying pressures still posed challenges.

The bank's latest Statement on Monetary Policy projected that inflation would not reach the mid-point of the target range until 2026, highlighting the need for continued vigilance.

In her remarks, Bullock refrained from commenting on potential rate adjustments in the near term but reiterated the RBA's "not ruling anything in or out" stance, keeping open the possibility of future hikes if inflationary risks persisted.

She noted that demand remained above supply in key areas, especially in the services sector, while labour market conditions were robust despite slight easing.

Unemployment edged up to 4.1% in September, and wage growth had moderated; but productivity remained a weak point, particularly in service-oriented industries.

The RBA's updated forecasts signalled only modest economic growth, with the Australian economy expected to face headwinds, including subdued consumer spending amid high borrowing costs.

Public demand, however, was anticipated to lend some support as private investment waned.

Global uncertainties, particularly China's policy trajectory and geopolitical risks, added further complexity.

While rate cuts were widely predicted to begin in the first half of 2025, Bullock said that rates, if reduced, would not revert to the record lows seen during the Covid-19 pandemic.

Sean Langcake, head of macroeconomic forecasting at Oxford Economics, said there were no surprises from the RBA meeting.

"The major takeaways from the RBA's statement were that they still see the economy as running beyond its capacity, and underlying inflation is still too high for rate cuts to be imminent," he noted.

"Rate hikes appear to be well and truly off the table - it has now been a year since the last rate hike. The RBA is playing a patient game of waiting for output to come back to the economy's potential.

"This means the recent run of very weak growth is likely to continue, notwithstanding the nascent signs of a pickup in consumption growth.

"We still expect to see the first rate cut in the second quarter of 2025, but the balance of risks around this are shifting toward the first easing coming later, rather than sooner."

Reporting by Josh White for Sharecast.com.