RBA Holds Interest Rates Steady Ahead of Federal Election

RBA holds rates steady, citing inflation risks, global uncertainty, and tight labour markets despite easing price pressures and recovering demand.

Australian dollar coins and banknotes in Melbourne, Australia on April 4, 2024. AAP Image/Joel Carrett

In its final monetary policy meeting before the federal election, the Reserve Bank of Australia (RBA) has kept interest rates unchanged, despite government hopes for a further cut.

The Board cited global uncertainties and the need for confidence in inflation returning to its target range before adjusting policy.

“The Board needs to be confident that this progress will continue so that inflation returns to the midpoint of the target band on a sustainable basis. It is therefore cautious about the outlook,” the RBA said.

The latest Consumer Price Index (CPI) data showed inflation slowed to 2.4 percent in February, down from 2.5 percent in January, marking a continued decline since its peak in 2022.

As inflation continues to ease, the RBA noted that financial stress in households has declined and real household incomes have picked up.

However, businesses still struggle to pass on costs due to weak demand, and labour market conditions remain tight, with labour availability continuing to challenge employers.

The RBA’s latest decision follows its February rate cut—the first since November 2020—that lowered the cash rate from 4.35 percent to 4.10 percent.

The move reflected easing inflationary pressures and a subdued domestic demand environment.

Despite this, the Board remains cautious, indicating that future rate decisions will depend on evolving economic conditions and risks.

Global Factors Weigh on Policy Decisions

The RBA remains wary of global economic developments, particularly the impact of U.S. tariffs and geopolitical tensions. It comes at a time when more U.S. tariffs will come into effect.

“Recent U.S. tariff announcements have affected global confidence, and any expansion of tariffs or retaliatory measures could amplify economic uncertainty,” the Board warned.

Such developments could dampen global economic activity if firms and households delay expenditures.

While some central banks have eased monetary policy in response to slowing inflation, global risks have prompted a more cautious approach.

With inflation returning to target as the RBA’s priority, the bank also reiterated its readiness to respond to international shifts that could materially impact Australian inflation and economic stability.

Labour Market and Domestic Uncertainties

Despite a decline in employment in February, the RBA highlighted that labour underutilisation remains low.

Wage pressures have eased slightly, but productivity growth remains sluggish, keeping unit labour costs high. The Board warned of uncertainties in household consumption and domestic economic activity.

“Growth in household consumption is expected to rise, but if it remains weak, it could lead to slower output growth and a sharper deterioration in the labour market than anticipated,” the RBA noted.

Conversely, a stronger labour market could push inflation higher, complicating monetary policy.

The Board also acknowledged the risk of monetary policy lag effects, stating that firms’ pricing decisions and wage movements in response to economic conditions remain unpredictable.