The Reserve Bank Board has decided to keep the cash rate target unchanged at 4.35 percent and the interest rate on Exchange Settlement balances steady at 4.25 percent.
"Inflation remains above target and is proving persistent," noted the Board. Despite a significant decline from its peak in 2022, inflation continues to exceed the midpoint of the 2-3 percent target range. The trimmed mean measure of underlying inflation was recorded at 3.9 percent over the year to June, aligning with forecasts from May's Statement on Monetary Policy (SMP). Although headline inflation saw a decrease in July due to cost-of-living relief measures, it is not expected to sustainably return to target until 2026.
"The outlook remains highly uncertain," stated the Board. Central forecasts suggest that underlying inflation will return to the target range by late 2025 and approach its midpoint in 2026. This prediction is based on a weaker-than-expected capacity of the economy to meet demand, as evidenced by persistent inflation and a strong labor market.
Recent GDP data for June indicated weak growth, influenced by earlier declines in real disposable incomes and restrictive financial conditions affecting consumption, particularly discretionary spending. However, aggregate consumer demand showed resilience due to spending by temporary residents such as students and tourists.
Wage pressures have eased somewhat but labor productivity remains at levels seen in 2016 despite some improvement over the past year. Broader indicators suggest tight labor market conditions with gradual easing signs; employment grew by an average of 0.3 percent per month over three months ending August, while unemployment stood at 4.2 percent in August, up from mid-2023's low of 3.5 percent.
"Taken together, the latest data do not change the Board’s assessment at the August meeting that policy is currently restrictive and working broadly as anticipated," commented the Board. However, uncertainties remain regarding household consumption growth recovery and potential impacts on output growth and labor market conditions.
Internationally, there are also uncertainties with some central banks easing policies while remaining cautious about risks like weaker labor markets or stronger inflation. The Chinese economic outlook has softened, affecting commodity prices amid pronounced geopolitical uncertainties.
"Returning inflation to target is the priority," emphasized the Board. Achieving this within a reasonable timeframe aligns with RBA’s mandate for price stability and full employment. Long-term inflation expectations have so far been consistent with targets but vigilance against upside risks remains crucial.
The Board will continue relying on data and risk assessments for decision-making while monitoring global economic developments, domestic demand trends, and outlooks for inflation and labor markets closely.
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