The Reserve Bank of Australia (RBA) is unlikely to reduce interest rates before Q2 2025. Governor Michele Bullock emphasized that inflation must demonstrate sustained progress toward the target range of 2-3% before easing monetary policy. Currently, the cash rate remains at 4.35% to maintain restrictive conditions, given underlying inflation is projected to reach the top of the target range by late 2025 and its midpoint by 2026.
Despite slowing economic growth, inflationary pressures persist, with trimmed-mean inflation rising 0.8% in Q3 2023, according to Vanguard Senior Economist Grant Feng. While housing and goods inflation is gradually easing, services inflation remains stubbornly high, driven by administrative cost increases. Meanwhile, Australia's labor market remains tight, even with measures of capacity slightly easing.
Several factors offset the dampening effects of the RBA’s aggressive rate hikes since 2022:
Strong post-pandemic migration has bolstered aggregate demand.
Expansionary fiscal policy has supported growth, particularly in the lead-up to the federal election in Q2 2025.
Weak productivity growth continues to constrain supply, driving unit labor costs above the RBA’s target-compatible levels.
Given these dynamics, aggregate demand is likely to exceed supply, sustaining labor market tightness and delaying disinflation. Dr. Feng anticipates the RBA will begin easing rates slowly from mid-2025 but notes that significant improvements in productivity are crucial to balancing inflation control with economic growth. Without such improvements, prolonged demand suppression will be necessary, exacerbating economic stagnation.
Rick Maggi CFP, Financial Advisor (Perth), Westmount Financial
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