The Reserve Bank Board announced today that it has decided 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. It has fallen substantially since its peak in 2022 as higher interest rates have been working to bring aggregate demand and supply closer towards balance. However, inflation is still above the midpoint of the 2–3 percent target range. In underlying terms, represented by the trimmed mean, the CPI rose by 3.9 percent over the year to the June quarter, aligning with forecasts from the May Statement on Monetary Policy (SMP). Despite this, recent data indicates that inflation is proving persistent, remaining above the midpoint of the target for eleven consecutive quarters.
The economic outlook remains highly uncertain, with recent data showing a slow and bumpy process of returning inflation to target.
According to central forecasts in the latest SMP, inflation is expected to return to the 2–3 percent target range by late 2025 and approach its midpoint in 2026. This represents a slower return than previously forecast in May due to a larger-than-expected gap between aggregate demand and supply in the economy. This reflects an increase in domestic demand forecasts and a weaker capacity of the economy to meet that demand, evidenced by persistent inflation and ongoing strength in the labor market.
Substantial uncertainty surrounds these forecasts. Revisions to consumption and saving rates in recent National Accounts, high unit labor costs, and persistent inflation—particularly in services—suggest upside risks to inflation. Although wages growth appears to have peaked, it remains above sustainable levels given trend productivity growth.
Conversely, economic activity momentum has been weak with slow GDP growth, rising unemployment rates, and reports of business pressures. There is also a risk that household consumption may pick up more slowly than expected, resulting in continued subdued output growth and noticeable labor market deterioration.
Broader uncertainties include lags in monetary policy effects and responses from firms' pricing decisions and wages amid slower economic growth during excess demand periods while labor market conditions remain tight.
Internationally, there is high uncertainty about economic prospects. The Chinese economy's outlook has softened impacting commodity prices; some central banks have eased policies but remain cautious about persistent inflation risks; global financial markets have been volatile; and geopolitical uncertainties continue affecting supply chains.
Returning inflation to target within a reasonable timeframe remains the Board's highest priority consistent with RBA’s mandate for price stability and full employment. Longer-term inflation expectations align with targets but vigilance towards upside risks remains essential. The Board will not rule out any measures necessary until confident that inflation is moving sustainably towards its target range.
Decisions will be guided by evolving data assessments considering global economy developments, financial markets trends, domestic demand patterns alongside inflationary outlooks including labor market conditions.
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