Reserve Bank holds cash rate steady amid uncertainty over underlying inflation

The Reserve Bank of Australia (RBA) announced today that it will hold the cash rate steady at 4.35%. The announcement was in line with market expectations and the consensus among economic forecasters, including Deloitte Access Economics.

The RBA has made inroads into getting inflation under control, with the RBA Board noting headline inflation was 2.8% over the year to September 2024, down from 3.8% over the year to June. However, as widely recognised by the broader economic community, the RBA noted that this fall was expected due to declines in fuel and electricity prices in the September quarter and temporary cost of living relief. 

The RBA’s preferred measure of inflation, the trimmed mean, moderated to 3.5% over the year to September. The RBA noted that it requires further evidence that inflation was on track toward its 2-3% target band before it could lower interest rates.

The latest Statement on Monetary Policy was also released today by the RBA at the same time as the interest rate decision. It presented new analysis showing Australia has the second-highest underlying inflation rate of any major advanced economy. Several factors that explain this result have been discussed in the latest editions of Business Outlook. First, the wave of post-pandemic inflation and the subsequent commencement of interest rate hikes occurred later in Australia than it did elsewhere. Further, the RBA did not raise interest rates as much as central banks in other advanced economies. 

Chart 1: Annual inflation, Australia and international comparisons

Source: ABS, BLS via FRED, ONS, Statistics Canada

The RBA’s key economic forecasts were little changed in the November Statement on Monetary Policy, with the bank maintaining a view that aggregate demand is still above the economy’s supply capacity.

Deloitte Access Economics remains unconvinced by the Reserve Bank’s view on the balance of supply and demand in the Australian economy. An economy’s supply capacity is difficult to measure, and estimates vary widely. For example, the OECD has been suggesting for several months now that demand in Australia is lagging below supply, with the gap only to widen over the coming 12 months.

While employment growth has been strong, gains have been increasingly dominated by the non-market sectors of the economy. Additionally, job vacancies have continued to fall, and the unemployment rate has been edging up gradually. Finally, gains in real wages are likely to be modest and are unlikely to detract from a sustainable decline in underlying inflation.

While different levels of government have played an important role in supporting vulnerable households over the past few years, the current level of government spending risks making the Reserve Bank’s task of reducing inflation more challenging. Government spending hit a record high of 27.3% of GDP in the June quarter.

The RBA itself conceded it had done a poor job predicting the magnitude of the recent rise in government spending, calling out the growth in government spending as one of the reasons it no longer expected underlying inflation to return to target until mid-2026.

More generally, in announcing today’s interest rate decision the RBA largely kept to its recent script, repeating that the “Board is not ruling anything in or out” and that “sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority”.

The RBA’s next move is very likely to be to cut interest rates. While the timing remains uncertain, Deloitte Access Economics continues to expect interest rates to be reduced in February 2025.

This newsletter was distributed on 5th November 2024. For any questions/comments on this week's newsletter, please contact our authors:

This blog was co-authored by Naasha Kermani, Senior Economist at Deloitte Access Economics

Click on the links below to read our previous Weekly Economic Briefings:

• Headline inflation back in target but underlying price growth remains sticky (31 Oct)
• Deloitte Access Economics Business Outlook: Supply stumbles (23 Oct)
• China risks a protracted slowdown without significant stimulus (17 Oct)
• Housing market: lots of pain, not much gain (09 Oct)