The Reserve Bank of Australia (RBA, Financial) has once again held its interest rate steady at 4.35%, marking the eighth consecutive meeting at this 13-year high. This decision aligns with market expectations as the RBA continues to tackle stubborn inflation while awaiting the outcome of the U.S. elections.
The Australian dollar remained stable against the U.S. dollar following the announcement. The RBA has maintained its stance on keeping all policy options open and highlighted significant international uncertainties. In its policy statement, the RBA reiterated its commitment to bringing inflation back to target levels and emphasized the need for sufficiently restrictive policies until sustainable progress is seen.
With core inflation remaining high and service sector inflation only gradually declining, the RBA doesn't expect inflation to hit the mid-point of its target range before 2026. Consequently, the RBA has lowered its forecasts for GDP and household consumption growth, as well as CPI and core inflation predictions. Specifically, GDP growth is forecasted at 1.5% for December 2024, rising to 2.3% by December 2025, and 2.2% by 2026. Meanwhile, CPI is projected at 2.6% for December 2024, 2.5% by June 2025, and 3.7% by December 2025, with a return to 2.5% by December 2026.
RBA Governor Philip Lowe has consistently indicated that a rate cut is not imminent, emphasizing the need for inflation to sustainably fall within the 2-3% range before considering such a move. As a result, traders have shifted their rate cut expectations from February 2025 to May 2025. Although core CPI has receded from its 2022 peak, it remains elevated at 3.5%, and service inflation is still strong. The RBA's latest forecast anticipates reaching the 2-3% core inflation range by mid to late 2025, earlier than previously estimated.
Despite other major central banks like the Federal Reserve beginning to ease rates to support economic growth, the RBA's policy continues to be less restrictive, underscoring its unique position. Additionally, potential international trade policy changes, such as those from a possible new Trump administration, could affect Australia.
Australia's economic growth has slowed significantly due to tight monetary policy over the past year. However, the labor market remains robust, with unemployment at a historic low of 4.1%. This gives Governor Lowe and his colleagues confidence in achieving a soft landing. Analysts suggest that strong employment supports demand, but misalignment between monetary and fiscal policies complicates the RBA's task.
According to Su-Lin Ong, Chief Economist at the Royal Bank of Canada, Australia's public spending is heated, aligning with a moderate easing cycle expected in 2025. Fitch Ratings anticipates a budget deficit for the 2025 fiscal year, reflecting tax cuts, cost-of-living support, and declining export prices. The government, however, denies that its fiscal policies contribute to rising prices.
Pressure for the RBA to cut rates by February next year is mounting, as noted by Finder's Head of Consumer Research, Graham Cooke. He pointed out that despite reaching the RBA's 2-3% inflation target range, an automatic rate cut is unlikely, disappointing homeowners. In October, nearly 47% of borrowers struggled with loan repayments, a record high, forcing many to cut spending in other areas. Many people are reliant on the anticipated rate cuts in 2025.
