In her debut monetary policy meeting as governor, Michele Bullock steered the Reserve Bank of Australia (RBA) on Tuesday to hit pause on the cash rate target, marking a fourth consecutive month of steadiness at an 11-year zenith of 4.10%. This decision trails a series of rate hikes initiated in May of the preceding year, elevating the official cash rate from a nadir of 0.1% to 4.1% by June this year, a strategy aimed at reining in soaring inflation.
The RBA’s statement post-meeting elucidated that the higher interest rates are functioning to instil a more enduring equilibrium between supply and demand in the economy, and the current pause will afford additional time to evaluate the reverberations of the rate augmentations thus far alongside the economic vista.
Whilst inflation in Australia has transcended its apex, it remains elevated and is prognosticated to linger at these levels for a protracted period. The indicators suggest a diminution in goods price inflation, yet the cost of myriad services and fuel prices have notably ascended of late. Rent inflation is still on an upward trajectory. The core anticipation is for the Consumer Price Index (CPI) inflation to persist on a downward trajectory, aligning within the 2-3% target range by the tail end of 2025.
The Australian economy exhibited a semblance of stronger growth than anticipated during the first half of the current year. However, it continues to traverse a phase of below-trend growth due to high inflation exerting a drag on real incomes, thereby stifling household consumption and dwelling investment. On the brighter side, the labour market retains its robustness, although there’s a slight relaxation in conditions. The unemployment rate is envisaged to inch upwards gradually to around 4½% by late next year. Wage growth has seen a moderate upswing over the past year but aligns with the inflation target, granted that productivity growth accelerates.
Bullock and the board remain steadfast in their objective of steering inflation back to target within a feasible timeframe, accentuating the detrimental effects of high inflation on the economy and the populace. It erodes savings, strains household budgets, complicates planning and investment for businesses, and exacerbates income inequality.
The recent data offer a glimmer of hope, depicting a pathway for inflation to realign with the 2-3% target range over the forecasting period, alongside a continual growth in output and employment. However, the journey ahead is laced with significant uncertainties, encompassing persistent services price inflation both domestically and overseas, potential delays in the effectuation of monetary policies, and the reaction of firms’ pricing decisions and wages to the economic slowdown amid a taut labour market.
Further tightening of monetary policy might be on the horizon to ensure inflation reverts to target within a reasonable timeframe. This will hinge on the evolving data and risk assessment.
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The Reserve Bank of Australia (#RBA) keeps its cash rate at 4.10%, aiming to assess previous rate hikes' impact on the #economy. #Inflation remains high, & further rate increases are possible. 🏦📈📉 #TheIndianSunhttps://t.co/qMfDWfu90x
— The Indian Sun (@The_Indian_Sun) October 3, 2023
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