Unfazed by recent moves from other central banks, particularly the US Federal Reserve making its first interest rate cut in four years, the nine-member Board emerged from its two-day policy meeting on Tuesday afternoon delivering the widely anticipated decision.
Australia's cash rate has remained at 4.35% since November 2023, even as interest rates in other developed economies have been falling.
"Some central banks have eased policy, although they note that they are removing only some restrictiveness and remain alert to risks on both sides, namely weaker labour markets and stronger inflation," the Board noted in its post-meeting statement.
The country's sluggish economic growth, coupled with weak retail sales and consumption, has been weighing heavily on Governor Michele Bullock and her team of policymakers.
However, the RBA has maintained its hawkish stance, asserting that cash rate cuts remain off the table until it sees strong evidence that inflation is falling back to the 2-3% target band.
"Sustainably returning inflation to target within a reasonable timeframe remains the Board's highest priority. This is consistent with the RBA's mandate for price stability and full employment," the statement reads.
"To date, longer-term inflation expectations have been consistent with the inflation target and it is important that this remain the case."
Maintaining a hawkish tone as in previous statements, the Board reinstated its resolve to "do what is necessary to achieve that outcome."
In its revised Statement on Monetary Policy (SMP) in August, the RBA projected that trimmed mean inflation would return to the mid-point of the target range - 2.6% - by the end of 2026.
According to the RBA, the revision to forecast "reflected a judgement that the economy's capacity to meet demand was somewhat weaker than previously thought, evidenced by the persistence of inflation and ongoing strength in the labour market."
Inflation nears the target band - what could go wrong?
The latest inflation data the rate-setting committee had prior to the meeting was the monthly consumer price index (CPI) indicator which showed annualised inflation rate stood at 3.5% in the 12 months to July.
Economists expect this figure will fall within the RBA's target range when the latest CPI data is released on Wednesday, a day after the RBA handed down its decision.
CBA forecasts the indicator to drop by 0.8 percentage points and land at 2.7% in August on the back of energy rebates, general disinflation in other CPI categories, and base effects from the previous year.
The Reserve Bank has previously acknowledged that recent budget measures, including federal and state electricity rebates, will "temporarily reduce" headline inflation.
The RBA modelling released under the Freedom of Information (FOI) Act earlier this month revealed these cost-of-living measures will reduce headline inflation by around 0.6 ppts in the September quarter.
However, the modelling also noted the risks of these rebates unwinding in 2025 will result in base effects - adding around 0.8 ppts to year-ended inflation in the same quarter next year.
And that is assuming these rebates are not extended.
Nonetheless, the RBA typically looks beyond these headline figures and focuses instead on the trimmed mean inflation which excludes volatile items in measuring price increases.
"While headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high," according to the post-meeting statement.
"Data since then have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out."
Gov Bullock is set to front a press conference today at 3:30 p.m. (AEST) where she is expected to parrot the same hawkish narrative.
When will the RBA lower the cash rate?
Prior to today's announcement, ASX traders placed a 90% probability that the RBA would maintain its sustained pause.
All major bank economists agree that if the RBA finally lifts a finger, it would be to cut the benchmark rate, although they all have different timelines for the when.
| Bank Economists | First cut expected | Number of cuts forecast | Rate outcome by end 2025 |
|---|---|---|---|
| Commonwealth Bank | December 2024 | 5 | 3.10% |
| Westpac | February 2025 | 4 | 3.35% |
| NAB | May 2025 | 5 | 3.10% |
| ANZ | February 2025 | 3 | 3.60% |
Until several months ago, CBA, NAB, Westpac, and ANZ were in line in forecasting that the axe would be dropped in November.
Since then, the ANZ has pushed back its rate cut call to February next year, the same with Westpac.
NAB expects the central bank to begin cutting rates in its meeting in May 2025.
CBA, the last to revise its call, only moved its forecast to December after the latest jobs print revealed the labour market remains stronger than the RBA prefers.
The Board's penultimate meeting this year is scheduled on 4-5 November - Melbourne Cup Day.
Photo courtesy of RBA
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