The RBA has delivered another reprieve for mortgage holders with a hold in its first cash rate decision of 2024.
Governor Michele Bullock said the cash rate target would remain the same at 4.35 per cent after inflation eased during the December quarter and the latest goods price inflation figures came in below the RBA’s November forecasts.
“[Goods price inflation] has continued to ease, reflecting the resolution of earlier global supply chain disruptions and a moderation in domestic demand for goods. Services price inflation, however, declined at a more gradual pace in line with the RBA’s earlier forecasts and remains high. This is consistent with continuing excess demand in the economy and strong domestic cost pressures, both for labour and non-labour inputs,” the statement said.
“Higher interest rates are working to establish a more sustainable balance between aggregate demand and supply in the economy. Accordingly, conditions in the labour market continue to ease gradually, although they remain tighter than is consistent with sustained full employment and inflation at target. Wages growth has picked up but is not expected to increase much further and remains consistent with the inflation target, on the assumption that productivity growth increases to around its long-run average. Inflation is still weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment.”
The RBA’s decision also highlighted ongoing concerns around Australia’s uncertain economic outlook, with the expectation that inflation would now return to the target range of two to three per cent in 2025, and to the midpoint in 2026. The central bank said the effects of monetary policy decisions have lagged in Australia, as wages react to the slower economic growth at a time of “excess demand” and a tight labour market.
“Services price inflation is expected to decline gradually as demand moderates and growth in labour and non-labour costs eases. Employment is expected to continue to grow moderately and the unemployment rate and the broader underutilisation rate are expected to increase a bit further,” the RBA’s decision said today.
“While there have been favourable signs on goods price inflation abroad, services price inflation has remained persistent and the same could occur in Australia.”
The Board also emphasised the potential for future interest rate increases despite the latest data showing inflation cooling, as returning inflation to the target range will still take some time.
“The Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”
While this wasn’t the ‘dovish’ report that some had been hoping for (the RBA didn’t give any indication that easing was in sight, instead hinting at the possibility of further rate increases), the general consensus is that rate hikes are likely done (despite today’s messaging). But more importantly, it appears that the Australian economy is heading towards a ‘soft landing’ potentially avoiding recession - now that’s reason to celebrate.
Rick Maggi