Reserve Bank Cautiously Optimistic About Inflation Drop

Governor of the Reserve Bank of Australia (RBA) Michele Bullock speaks to the media during a press conference in Sydney, Australia, on Feb. 6, 2024. AAP Image/Bianca De Marchi

The Reserve Bank of Australia (RBA) has expressed tentative optimism following a notable drop in inflation. Governor Michelle Bullock has urged patience, stressing the importance of sustained progress.

The Australian Bureau of Statistics (ABS) reported that the Consumer Price Index (CPI) held steady at 2.1 per cent for the 12 months to October 2024, marking the lowest annual inflation rate since July 2021.

Governor Bullock acknowledged this milestone as a “welcome relief” for Australians grappling with rising living costs but highlighted the need for further improvement.

“This is welcome relief for people feeling the pinch from the rise in the cost of living over the past two years—which is everyone, but particularly the more vulnerable people in our community,” Bullock said during her address at the Committee for Economic Development of Australia (CEDA) Annual Dinner in Sydney on Nov. 28.

However, she cautioned that inflation must be reduced sustainably within the 2–3 per cent target range, adding, “The word ‘sustainably’ is important because it recognises that we need to look through temporary factors that influence the headline inflation rate from time to time.”

Tight Labour Market Keeps Cash Rate Steady

Australia’s tight labour market continues to delay inflation’s return to the RBA’s 2.5 per cent target, prompting caution on cash rate changes.

Bullock did not commit to any new timeline for a possible cut.

She added that while global central banks ease policies as inflation nears targets, Australia’s demand still outpaces supply, keeping financial conditions restrictive.

The RBA projects inflation to stabilise by late 2026, assuming the cash rate remains unchanged. However, the bank stressed this was a scenario, not a forecast, and policy adjustments would depend on new data.

“I should be explicit here that this is not the Board’s forecast for interest rates. It is a conditioning assumption but, along with other information available at the time,” she said.

Government Rebates and Fuel Prices Aid Drop

The governor attributed part of the decline to temporary factors, including government electricity rebates and global fuel price fluctuations.

“While these temporary factors have undoubtedly helped many Australians, our approach is to look through them to some extent to better understand where inflation will settle in the medium term,” Bullock explained.

Despite progress, she flagged that underlying inflation remains a concern, citing trimmed mean inflation, which stood at 3.5 per cent over the year to September—down from 5.1 per cent the previous year but still above the target range.

“At this current level, we are of the view that monetary policy is restrictive,” she noted.

Bullock also highlighted ongoing economic pressures, with demand outpacing supply in Australia’s tight labour market.

“Elevated inflation indicates that the level of demand in the economy is above the ability of the economy to supply the goods and services demanded. But the evidence suggests that this gap is narrowing,” she said.

Treasurer Celebrates Progress, Opposition Criticises

Treasurer Jim Chalmers hailed the latest CPI data as evidence of the government’s successful economic management, pointing out that inflation is now a third of what it was under the previous government.

“This is another really encouraging sign our policies are helping to get inflation down after it was higher and rising under the Liberals,” Chalmers said, adding that inflation had stayed within the RBA’s target band for three consecutive months—a first in nearly five years.

However, opposition leaders remain critical of the government’s approach, arguing it has failed to adequately address cost-of-living pressures for everyday Australians.