The Reserve Bank of Australia (RBA) has opted to maintain its official cash rate at 4.35%, a decision mirrored by the consensus among economists surveyed by Reuters. This steadfastness, which is expected to persist through the end of the year, arises from the interplay of robust economic activity and core inflationary pressures that still warrant a vigilant approach. While consumer price inflation has shown signs of moderation—falling to 2.8% last quarter—core inflation remains a key concern, suggesting that the RBA must tread carefully as it navigates its monetary policy.
Australia’s economy is currently exhibiting a mix of encouraging and troubling signals. The reduction in consumer price inflation to 2.8% marks a significant development, as it aligns with the RBA’s long-sought target range of 2-3% for the first time in three years. However, the underlying core inflation, stripped of volatile items such as food and energy, remains elevated. This dichotomy presents the RBA with a unique challenge, as persistently high core inflation signals that underlying economic pressures are still significant.
The RBA’s recent monetary history is marked by an aggressive tightening cycle after the COVID-19 pandemic, where it raised interest rates by a total of 425 basis points, a notably moderate increase compared to other central banks globally. This more tempered approach was partially inspired by a dual mandate: combating inflation while also promoting job creation. As a result, Australia’s jobless rate has held steady in the 4.0% to 4.2% range since April, presenting a relatively strong labor market.
As economists examine the landscape ahead, forecasts for the RBA’s monetary policy point toward a continuation of the current cash rate in the short term. The results from a recent poll indicated unanimous expectations among participating economists that the rate would remain unchanged during the next central bank meeting scheduled for November 5. Notably, all but one economist predicted an ongoing hold at the December meeting.
Craig Vardy from BlackRock noted that while the RBA is likely to maintain its current rate, there may be a shift in communication from a hawkish stance to a more balanced viewpoint. His assessment aligns with the general expectation among major financial institutions, including ANZ, CBA, NAB, and Westpac, all forecasting no immediate rate changes this year yet anticipating possible reductions early in 2025.
A significant portion of economists, approximately 70% of those with forward-looking projections, believe that the RBA will enact a modest rate cut of 25 basis points in February 2025, bringing the cash rate down to 4.10%. Meanwhile, the majority of financial markets are positioning themselves for an initial cut even later, in April of the same year.
In light of the expectations around the Reserve Bank of Australia’s policy, it is critical to consider how its cautious stance contrasts with the more aggressive rate-cutting seen from the U.S. Federal Reserve. This divergence has implications for the Australian dollar, which—according to a separate inquiry of foreign exchange strategists—may recover from its year-to-date losses if the Fed continues on its easing path. By the end of January, analysts predict that the Australian dollar could stabilize around $0.68.
Economic commentary suggests that core inflation is unlikely to return to the RBA’s target range until mid-third quarter of the upcoming year. This delay underpins the central bank’s hesitance to significantly reduce rates without a broader economic slowdown or recession. AMP economist My Bui emphasized that any future rate cuts should be viewed as a corrective measure aimed at returning to a more normalized rate environment, slightly above 3%.
The Reserve Bank of Australia stands at a crossroads, balancing the delicate act between fostering economic growth and controlling inflation. Its current policy of maintaining the cash rate amidst mixed economic indicators underscores a vigilant approach, mindful of both domestic challenges and international monetary trends. As the year progresses, the RBA’s decisions will be critical not only for economic stability but also for shaping the expectations of businesses and consumers alike, impacting Australia’s overall financial landscape.