Despite inflation dropping to 2.8% as of September 2024, the Reserve Bank of Australia (RBA) has released its Monetary Policy Decision, which Governor Michele Bullock presented on November 5th, stating that the cash rate will stay at 4.35 percent effective today (November 6th, 2024). The 4.35 percent cash rate has remained on hold since November 2023 with no changes being made due to the RBA emphasising that inflation has to be closer to 2% to drop rates. A few key reasons why the RBA has opted to dismiss a cash rate cut and keep it on hold:
Key Reasons stated by the Reserve Bank of Australia:
According to the RBA, underlying inflation remains too high.
Since its peak in 2022, inflation in Australia has visibly declined with the higher interest rates given to help bring aggregate demand and supply closer to balance.
As the RBA notes: “Headline inflation was 2.8 per cent over the year to the September quarter, down from 3.8 per cent over the year to the June quarter. This was as expected due to declines in fuel and electricity prices in the September quarter. But part of this decline reflects the temporary cost of living relief.” With the percentage currently sitting at 2.8%, the 2.5% target is yet to sustainably return until predicted mid-2025-2026, hence the announced dismissal.
Things are slowly improving, but risks remain high, with the outlook remaining severely uncertain. Certainly, inflation has dropped down although, underlying inflation remains high; it’s not where the RBA wants it yet.
Consumer demand, boosted by spending, has increased, although household spending remains stagnant due to the tight labour market. Employment growth is at a stable participation rate, although unemployment has slightly risen to 4.1%.
Pressures of the labour market have eased, but the productivity of wages remains stagnant. According to the Reserve Bank, they believe that the current policies are effective, although uncertainties are always present.
With expectations for household spending to pick up during Christmas time, slower, unexpected growth is a possibility, with only timing promised to tell the outcome. Trusted Global connections with China are uncertain too as their economy weakens amid measures to recover showing positiveness.
The current top priority is to sustainably return inflation to a target of 2.5% within a reasonable timeframe. The RBA notes, “While headline inflation has declined substantially and will remain lower for a time, underlying inflation is more indicative of inflation momentum, and it remains too high. The November SMP forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint. “
In regards to future decisions, the Board will base its decision on data and ongoing risk assessments while also closely monitoring global economic changes, trends, and the labour market. The RBA is heavy on commitment to doing what it takes to bring inflation back to target and support Australians.
Good news or Bad news for Banks in Australia?
Not good or bad news for banks as they continue to pay the same interest rate to borrow funds from other banks in the money market overnight. It influences all other interest rates, including mortgage and deposit rates. The board will meet on December 9, with a pre-Christmas decision handed down on December 9.
Written By: Eva Pocrnja
Published: 6th November 2024