RBA’s rates decision ‘reduces recession risk’ for Australia

At its meeting yesterday, the Reserve Bank Board left the cash rate target unchanged at 4.35 per cent.

In its statement, the RBA noted that inflation had fallen substantially since its peak in 2022, with higher interest rates working to bring aggregate demand and supply closer towards balance.

However, it also noted that inflation is still some way above the midpoint of the 2–3 per cent target range.

"In underlying terms, as represented by the trimmed mean, the CPI rose by 3.9 per cent over the year to the June quarter, broadly as forecast in the May Statement on Monetary Policy (SMP). But the latest numbers also demonstrate that inflation is proving persistent," it said.

"In year-ended terms, underlying inflation has now been above the midpoint of the target for 11 consecutive quarters and quarterly underlying CPI inflation has fallen very little over the past year."

The RBA also said the economic outlook was uncertain and that recent data had demonstrated that the process of returning inflation to target has been slow and bumpy.

"The central forecasts set out in the latest statement on monetary policy are for inflation to return to the target range of 2–3 per cent late in 2025 and approach the midpoint in 2026," the RBA said.

"This represents a slightly slower return to target than forecast in May, based on estimates that the gap between aggregate demand and supply in the economy is larger than previously thought. In part, this reflects an increase in the forecast for domestic demand."

Deloitte Access Economics partner Stephen Smith said the decision to keep interest rates on hold was the right decision for both businesses and households and will "reduce the risk of a recession we don't have to have".

"It is now looking increasingly certain that the next move in the cash rate will be down, not up, with the RBA clearly concerned that its quest to stamp out inflation might derail an emerging recovery," Smith said.

With inflation trending down, a weak Australian economy, and rising volatility in global markets, Smith said Australia needs an environment where businesses can invest for growth.

"The Reserve Bank is walking a tightrope, balancing its twin objectives to fight inflation and maximise employment in the economy."

"Last week’s CPI figures show two things. First, that annual core inflation is already trending down without further rate hikes and has now reached its lowest rate in two years.

"Second, the areas where inflation remains in the economy – rents, insurance, and weather-dependent produce – cannot be subdued by further rate hikes. The Australian economy is not suffering from rampant demand, so the case for a rate hike is weak."

Smith said while there is a need to remain vigilant on inflation, the pivot to investing for growth is now the priority.

"The RBA is trying to thread the needle and today’s decision brings them closer to that goal," he said.

BDO Economics partner Anders Magnusson agreed that the RBA made the right decision to hold the cash and that few economists would disagree.

"This inflation cycle is a marathon, and RBA is staying composed through the last mile, despite recent criticisms that it’s not doing enough to tackle persistent inflation," Magnusson said.

RBA will be keeping a close eye on public demand as strong spending on the National Disability Insurance Scheme, Medicare and the Pharmaceutical Benefits Scheme has led it to delay its forecast return of inflation to the target band to late 2025. It will also consider how stage 3 tax cuts will impact inflation, which won’t be known until inflation data is released in October.

Magnusson said the RBA cannot influence the price of some items in the CPI basket, such as utilities and non-market goods.

"Inflation for the items that it can influence is already within the RBA’s target band. Recent retail sales data shows that lever in action, with a consistent decline in retail sales volume as well as per capita retail volumes as consumers continue to tighten their belts," he said.

"While the unemployment rate and underlying inflation are moving in the right direction, progress is slow. The unemployment rate is expected to stay well below pre-COVID levels for some time, and the RBA says they want to hold on to the benefits that come from this."

BDO said while underlying inflation remains stubbornly high, it has steadily declined for six consecutive quarters and was just above the RBA’s forecast for the June quarter.

"The RBA won’t hesitate to take a hawkish stance if the October CPI release brings bad news. However, I believe that, if the economy is resilient to these new cash injections, then the RBA will announce its first rate cut in 2025, perhaps even early in the year," he said.