No Christmas Gift from the RBA: Cash Rate Remains Unchanged

A man walks past the Reserve Bank of Australia in the central business district of Sydney on June 7, 2022. - Australia's central bank raised interest rates by a higher-than-expected half percentage point on June 7 and warned of more increases, trying to rein in "significantly" increased inflation. (Photo by Muhammad FAROOQ / AFP) Photo by MUHAMMAD FAROOQ/AFP via Getty Images

The Reserve Bank of Australia (RBA) has disappointed mortgage holders during the Christmas month by maintaining the cash rate steady at 4.35 percent.

The Board says despite inflation falling from its peak in 2022, underlying inflation remains high. The RBA has signalled that inflation is unlikely to reach its target until 2026.

This means that households will need to continue tightening their belts as the economy faces ongoing challenges.

In a statement released on Dec. 10, central bank said inflation would not return sustainably to its target range until 2026, with underlying inflation remaining far above the target midpoint of 2.5 percent.

The bank stressed that higher interest rates have played a key role in reducing inflation by curbing aggregate demand.

Recent data from the Australian Bureau of Statistics (ABS), released on Dec. 4, showed that the Australian economy expanded by 0.3 percent in the September quarter, marking a slight improvement over the 0.2 percent growth seen in the previous three months.

However, the quarterly growth missed the anticipated 0.5 percent increase.

On an annual basis, the economy grew by 0.8 percent, down from 1 percent in June and below the expected 1.1 percent growth.

Labour Market Tightness and Eased Wage Pressures

RBA claimed that despite these economic challenges, the labour market remains tight, though some indicators show signs of easing.

The unemployment rate rose to 4.1 percent in October, up from 3.5 percent in late 2022.

However, employment growth was strong over the three months to October, with the participation rate remaining near record highs.

Vacancies are still relatively high, and average hours worked have stabilised.

Wage pressures have eased more than expected. The Wage Price Index (WPI) grew by 3.5 percent for the year to the September quarter, down from the previous quarter’s pace.

However, labour productivity growth remains weak, and some cyclical labour market indicators, such as youth unemployment and underemployment rates, have declined in recent months.

Inflation Risks and the Global Economy

The Board says while inflationary pressures are easing, it cautions that risks remain.

“Global central banks are easing policies, but geopolitical uncertainties and a fragile global economy persist,” it said.

Domestically, slower-than-expected recovery in household consumption could hinder growth and worsen labour market conditions.

Governor Call for Patience and Long-Term Focus

RBA Governor Michelle Bullock urged patience in the fight against inflation.

Speaking at the Committee for Economic Development of Australia (CEDA) Annual Dinner on Nov. 28, she acknowledged that the recent easing in headline inflation provided welcome relief, particularly for Australians struggling with rising living costs.

However, Bullock said the primary focus must remain on sustainably reducing inflation within the 2-3 percent target range.

She also highlighted the need for continued vigilance, noting that the RBA would need to assess a wide range of economic and financial indicators to guide its future decisions.

In October, the International Monetary Fund (IMF) advised the Australian government to implement more restrictive fiscal policies to combat inflation.

While the IMF acknowledged that cost-of-living support could temporarily reduce prices, it warned that such measures might also stimulate broader economic activity.

In its annual report, the IMF raised concerns over the government’s tax cuts, noting that while they could increase household disposable income, they might have unintended long-term consequences on the economy.

Chalmers Hopes to Announce New RBA Boards Before Christmas

Meanwhile, Treasurer Jim Chalmers has expressed a desire to announce the two new Reserve Bank boards—one solely focused on setting the cash rate and the other on governance—before Christmas, though the timeline depended on consultations.

This restructuring follows an agreement between Chalmers, the Greens, and the Senate crossbench to split the RBA board, marking the most significant overhaul of the central bank in decades.

“The appointments that we’re seeking to make to the Reserve Bank Board are first class and first-rate people, and we will consult in the coming days … I take that consultation very seriously,” Chalmers said in a press conference after the RBA’s decision to hold interest rates steady.

He further mentioned that discussions with the opposition on the potential composition of the boards had already taken place earlier this year.

“We have already—around the middle of the year—had conversations with the opposition about the possible make-up of the two boards.”

Regarding the RBA’s statement, Chalmers said that it showed “the board was gaining some confidence that inflationary pressures are declining.”

He also encouraged Australians to listen to Bullock’s explanation of the rate hold, stressing, “We are making welcome and encouraging progress against inflation, and that’s in the statement.”