Statement by the Reserve Bank Board: Monetary Policy Decision
At its meeting today, the Board decided to lower the cash rate target to 4.10 per cent and the interest rate paid on Exchange Settlement balances to 4 per cent.
The underlying rate of inflation is decreasing
Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance.
In the December quarter underlying inflation was 3.2 per cent, which suggests inflationary pressures are easing a little more quickly than expected. There has also been continued subdued growth in private demand and wage pressures have eased. These factors give the Board more confidence that inflation is moving sustainably towards the midpoint of the 2–3 per cent target range.
However, upside risks remain. Some recent labour market data have been unexpectedly strong, suggesting that the labour market may be somewhat tighter than previously thought.
The central forecast for underlying inflation, which is based on the cash rate path implied by financial markets, has been revised up a little over 2026.
So, while today’s policy decision recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing.
The Future
Private domestic demand is rising a bit more slowly than anticipated, production growth has been modest, and it is unclear how long the late 2024 recovery in household spending will last. Businesses in certain industries continue to indicate that it has been difficult to pass on cost increases to final prices, wage pressures have subsided somewhat more than anticipated, and inflation in housing costs is slowing down.
At the same time, a range of indicators suggest that labour market conditions remain tight and, in fact, tightened a little further in late 2024. Measures of labour underutilisation have declined, and business surveys and liaison suggest that availability of labour is still a constraint for a range of employers.
Furthermore, productivity growth has not picked up, which implies that growth in unit labour costs remains high.
More generally, there are questions about how monetary policy will take time to take effect and how businesses’ pricing and pay decisions will react to the economy’s slow growth and poor productivity results while labor market conditions are still tight.
There is still a great deal of uncertainty regarding the prospects overseas. There are significant geopolitical and policy uncertainties, which might hinder activity in many nations if individuals and businesses postpone spending until the future is more clear. As they grow more certain that inflation is returning to its objectives in a sustainable manner, the majority of central banks have been loosening monetary policy. However, in recent months, especially in the US, market expectations for more easing have somewhat cooled.
The polling madness starts
In order to give Anthony Albanese the confidence to call the next election, the prime minister’s staff will be conducting voter surveys in the hours and days ahead. They will be watching for indications that the gloomy attitude of mortgage holders may be beginning to change.
In an attempt to highlight what he regards as a significant political victory, the man himself hurried to set up a number of radio and television appearances for Tuesday afternoon.
According to him, “Australians will welcome this fall in interest rates today,” he told ABC Brisbane. “It’s certainly not job done, but they will welcome it.”
Jim Chalmers, the treasurer, was as ready to connect the “encouraging” choice to “making a meaningful difference” in Labor policymaking.
“This is the soft landing we have been planning for,” he stated.
The decision on Tuesday was never only about specific monetary policy issues.
Additionally, this decision might prove to be a pivotal political moment, similar to the well-known rate hike in 2007 that ended John Howard’s campaign against Kevin Rudd.
