The Board's decision on Tuesday was broadly anticipated, following the release of the June quarter CPI print revealing underlying inflation was slowing down.
Prior to the announcement, major bank economists and 80% of ASX traders believed the trimmed mean data hitting above the RBA's indicative forecast of 3.8% was not material enough to warrant a policy response.
While the central bank's rate-setting committee delivered what was expected, it cautioned that inflation risks were still on the upside in a sign policy is unlikely to be eased anytime soon.
The post-meeting statement generally reinstated most of Board's previous narratives, except for one notable addition that "policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range."
The RBA admitted the outlook is still uncertain and recent datasets have demonstrated that the process of returning inflation to target has been "slow and bumpy".
RBA in its revised forecast in May expects inflation to return within the target range of 2-3% before the end of 2025 until it approaches the midpoint in 2026.
"But the latest numbers also demonstrate that inflation is proving persistent," the Board's post-meeting statement reads.
"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 quarterly CPI print the ABS released on 31 July revealed Australia's annualised trimmed mean inflation - RBA's preferred gauge in measuring the rise in consumer prices - eased from the previous quarter's 4% to land at 3.9%.
Lower inflation and prevent recession: RBA's balancing act
Echoing its previous post-meeting statements, the Board said returning to inflation to target remains the "highest priority".
And with inflation proving hard to tame and risks of domestic recession ever-present, the RBA catches itself between a rock and a hard place.
"Momentum in economic activity has been weak, as evidenced by slow growth in GDP, a rise in the unemployment rate and reports that many businesses are under pressure," the rate-setting committee said.
"And there is a risk that household consumption picks up more slowly than expected, resulting in continued subdued output growth and a noticeable deterioration in the labour market."
However, the nine-member Board believes there are some uncertainties considering the lags in the effect of monetary policy and how firms' pricing decisions and wages will respond to the slower growth in the economy.
Despite little reference to recent financial market instability in the post-meeting statement - except for the mention of "financial markets" - RBA's latest policy decision came at the heels of the sharpest daily decline in Australian share prices since Covid.
Return to inflation further slows
Ultimately, the Board's decision to keep Australia's benchmark rate at its 12-year peak is intended to balance the risk that inflation could take longer to return to target with the risk that the labour market could ease significantly more than forecast.
"The cash rate will need to remain high enough to ensure inflation returns sustainably to the target range," the Board said.
In its revised Statement on Monetary Policy (SMP) in August, the RBA still expects trimmed mean inflation to return to the mid-point by the end of 2026, albeit at a slightly slower rate:
|
December 2024 |
June 2025 |
December 2025 |
June 2026 |
December 2026 |
|
|
August SMP |
3.5% |
3.1% |
2.9% |
2.7% |
2.6% |
|
May SOMP |
3.8% |
3.2% |
2.8% |
2.6% |
Forecasts are also little changed on the activity front, with GDP results expected to land at 1.7% in December 2024 (prior 1.6%), 2.5% in December 2025 (prior 2.3%), and 2.4% in December 2026.
"The outlook for growth has been upgraded due to stronger-than-forecast public demand as well as a pick-up in household spending as real incomes rise," the SMP reads.
RBA's indicative forecast for unemployment is revised up to 4.3% for December 2024 (prior 4.2%), 4.4% for December 2025 (prior 4.3%), and 4.4% for December 2026.
In the SoMP it was noted that "risks to the domestic outlook are assessed to be broadly balanced".
Photo courtesy of the RBA
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