The Reserve Bank Board has announced its decision to maintain the cash rate target at 4.35 percent and the interest rate on Exchange Settlement balances at 4.25 percent.
"Inflation remains above target and is proving persistent," the Board stated, noting that while inflation has significantly decreased since its peak in 2022 due to higher interest rates, recent data indicates a slowdown in this decline. Over the year to April, the monthly CPI indicator rose by 3.6 percent in headline terms and by 4.1 percent excluding volatile items and holiday travel, mirroring December 2023 levels.
Broader economic data suggest ongoing excess demand and elevated domestic cost pressures for both labor and non-labor inputs. Although labor market conditions have eased over the past month, they remain tighter than necessary for sustained full employment and targeted inflation levels. "Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth," according to the statement.
The economic outlook remains highly uncertain. Central forecasts from May projected inflation would return to the target range of 2-3 percent in the second half of 2025, reaching the midpoint in 2026. However, indications of weak economic activity momentum—such as slow GDP growth, rising unemployment rates, and slower-than-expected wages growth—pose risks alongside revisions suggesting stronger-than-previously-suggested consumption over the past year.
Recent budget outcomes may impact demand temporarily through federal and state energy rebates reducing headline inflation. The persistence of services price inflation remains a key uncertainty along with high unit labor costs despite easing growth.
Uncertainty also surrounds consumption growth with real disposable incomes stabilizing and expected to grow later in the year aided by lower inflation and tax cuts. Increased wealth driven by housing prices is anticipated to support consumption growth over the coming year; however, there is a risk that household consumption may pick up more slowly than expected.
Global uncertainties further complicate matters as output growth appears to have troughed in most advanced economies despite improvements in Chinese and US economic outlooks. Geopolitical uncertainties related to conflicts in the Middle East and Ukraine continue to pose potential supply chain disruptions.
Returning inflation to target within a reasonable timeframe remains a priority for the Board consistent with its mandate for price stability and full employment. "The Board needs to be confident that inflation is moving sustainably towards the target range," it emphasized, highlighting that medium-term inflation expectations have aligned with targets thus far.
Despite mixed recent data reinforcing vigilance against upside risks to inflation, determining an optimal path for interest rates remains uncertain. The Board will rely on evolving data assessments while closely monitoring global economic developments, domestic demand trends, and outlooks for inflation and labor markets.
"The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome."