At its meeting today, the Reserve Bank of Australia (RBA) Board decided to leave the cash rate target unchanged at 4.35 per cent and the interest rate paid on Exchange Settlement balances unchanged at 4.25 per cent.
This marks the eighth consecutive hold. The move reflects the bank’s cautious approach to managing inflation — which, despite some easing, continues to pose challenges. Headline inflation decreased to 2.8% in the September quarter, influenced by temporary factors such as lower fuel and electricity costs. However, underlying inflation, a more stable measure that excludes volatile items, remains at 3.5%, which is still above the RBA’s target range of 2% to 3%. According to the bank’s latest forecasts, inflation is expected to only reach the 2.5% midpoint of this range by 2026.
The RBA’s statement emphasised that returning inflation to target within a reasonable timeframe is its highest priority. Economic analysts interpret this as a signal that the RBA remains open to further tightening if inflation does not ease as projected.
This could mean a prolonged period of high rates.
This decision to maintain a restrictive monetary stance is likely to have consequences for household spending and broader economic growth. While elevated interest rates have already impacted discretionary spending, particularly among households, spending by temporary residents, such as international students and tourists, has provided some resilience. Yet, as high rates persist, the risk grows for subdued output growth as households face sustained financial constraints. Although the RBA forecasts a gradual increase in household consumption growth towards the year’s end, uncertainties remain around how quickly consumption will recover, potentially affecting the timing of any future rate cuts.
Labour market conditions continue to play a key role in the RBA’s inflation management strategy. Although unemployment remains steady at 4.1%, for the fourth month in a row, according to an October release by the Australian Bureau of Statistics (ABS), the participation rate remains high, with tight labour market conditions potentially keeping wages elevated. Any sustained wage growth could reinforce inflation, pressuring the RBA to keep interest rates high to prevent further price increases. Additionally, productivity gains, which remain only modest after years of stagnation, add complexity to this outlook, as productivity improvements are crucial for easing inflation without dampening wage growth.
