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The Reserve Bank of Australia left interest rates unchanged Tuesday, warning that inflation may prove more stubborn than expected even as the domestic economy shows signs of recovery.
The Monetary Policy Board voted unanimously to keep the cash rate at 3.60%, citing partial data suggesting inflation in the September quarter could exceed forecasts and signs that private demand is strengthening faster than anticipated.
“The decline in underlying inflation has slowed,” the board said in a statement following its monthly meeting. “Recent data, while partial and volatile, suggest that inflation in the September quarter may be higher than expected at the time of the August Statement on Monetary Policy.”
The decision marks a pause in the central bank’s approach to managing inflation, which peaked in 2022 but has proven resistant in recent months despite earlier rate cuts. Both headline and trimmed mean inflation fell within the bank’s 2-3% target range during the June quarter.
“Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and potential supply closer towards balance,” the board said.
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The board pointed to strengthening economic indicators that complicated its assessment. Private consumption is accelerating as household incomes rise and financial conditions ease, taking over from public spending as the primary driver of growth.
“Data for the June quarter show that private demand is recovering a little more rapidly than expected, taking over from public demand as the driver of growth,” the statement said. “In particular, private consumption is picking up as real household incomes rise and measures of financial conditions ease.”
Housing market conditions provided additional evidence that previous rate cuts are affecting the economy. The board noted the property sector is gaining momentum, a signal that monetary policy adjustments are taking hold.
“The housing market is strengthening, a sign that recent interest rate decreases are having an effect,” the board said. “Credit is readily available to both households and businesses.”
Labor market data presented a mixed picture. Employment growth has slowed more than forecast, but the unemployment rate held steady at 4.2% in August. The board characterized overall labor market conditions as remaining tight despite the moderation in hiring.
“Various indicators suggest that labour market conditions have been broadly steady in recent months and remain a little tight,” the statement said. “Measures of labour underutilisation remain at low rates and business surveys and liaison suggest that availability of labour has been little changed of late.”
Wage pressures continued to concern policymakers. While wage growth has eased from its peak, productivity gains remain weak, keeping unit labor costs elevated.
“Looking through quarterly volatility, wages growth has eased from its peak, but productivity growth has been weak and growth in unit labour costs remains high,” the board said.
The board acknowledged significant uncertainty clouding the economic outlook, stemming from both domestic consumption patterns and international trade developments. Recent strong growth and inflation data may indicate households are becoming more comfortable spending as their financial positions improve.
“Stronger-than-expected data on growth and inflation may indicate that households have become more comfortable consuming as real incomes and wealth rise,” the statement said. “If this continues, it may make it easier for businesses to pass on cost increases and lead to more demand for labour.”
However, the board cautioned that consumption growth might not continue, particularly if households grow concerned about global developments.
“Alternatively, the recent growth in consumption might not persist, particularly if households become more concerned about overseas developments,” the board said.
International factors weighed heavily in the board’s deliberations. While clarity has emerged regarding U.S. tariff policies and responses from other countries, suggesting extreme outcomes may be avoided, trade policy changes are still expected to harm global growth.
“Uncertainty in the global economy remains elevated,” the statement said. “There is a little more clarity on the scope and scale of US tariffs and policy responses in other countries, suggesting that more extreme outcomes are likely to be avoided. Trade policy developments are nevertheless still expected to have an adverse effect on global economic growth over time.”
The board identified broader geopolitical risks as potential threats to the global economy that could dampen aggregate demand and weaken domestic labor market conditions.
“Beyond tariffs, a broader range of geopolitical risks remain a threat to the global economy,” the statement said. “This could all weigh on growth in aggregate demand and lead to weaker labour market conditions in the domestic economy.”
Additional uncertainties complicated the board’s assessment, including time lags in the effects of recent monetary policy easing, the balance between aggregate demand and potential supply, labor market conditions and productivity outlook.
“There are also uncertainties regarding the lags in the effect of recent monetary policy easing, the balance between aggregate demand and potential supply for goods and services, conditions in the labour market and the outlook for productivity,” the board said.
The board framed its decision as prioritizing price stability and full employment. With private demand recovering, inflation showing persistence in some areas and labor market conditions remaining stable, maintaining the current rate level appeared appropriate.
“With signs that private demand is recovering, indications that inflation may be persistent in some areas and labour market conditions overall remaining stable, the Board decided that it was appropriate to maintain the cash rate at its current level at this meeting,” the statement said.
Financial conditions have eased since the beginning of the year and appear to be having some impact, but the board said time is needed to assess the full effects of earlier rate reductions.
“Financial conditions have eased since the beginning of the year and this seems to be having some impact, but it will take some time to see the full effects of earlier cash rate reductions,” the board said.
The board emphasized a cautious approach, updating its outlook as new data emerge while remaining alert to heightened uncertainty.
“The Board judged that it was appropriate to remain cautious, updating its view of the outlook as the data evolve,” the statement said. “The Board remains alert to the heightened level of uncertainty about the outlook.”
The board noted monetary policy is positioned to respond decisively to international developments if they materially affect Australian activity and inflation.
“It noted that monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia,” the statement said.
Looking ahead, the board said it will closely monitor incoming data and evolving assessments of the outlook and risks. Several factors will receive particular attention in future deliberations.
“The Board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions,” the statement said. “In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market.”
The board reaffirmed its commitment to its dual mandate of price stability and full employment.
“The Board is focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome,” the statement said.
The unanimous decision reflected agreement among board members on the appropriate policy stance given current conditions and uncertainties.
Financial markets showed limited reaction to the announcement, which largely aligned with economist expectations. The Australian dollar traded in a narrow range following the statement’s release.
The Reserve Bank’s next monetary policy meeting is scheduled for November, when the board will receive updated economic forecasts and additional data on inflation, consumption and labor market trends. Economists will watch September quarter inflation figures closely for signs of whether price pressures are indeed proving more persistent than the central bank hoped.
The cash rate has been cut from its peak earlier this year as inflation moderated from 2022 highs. The current 3.60% rate represents the board’s attempt to balance containing inflation while supporting economic growth and employment.
Tuesday’s decision leaves households and businesses facing continued elevated borrowing costs even as the economy shows mixed signals. While housing market strength and rising consumption suggest economic resilience, persistent inflation and global uncertainties present ongoing challenges for policymakers navigating the path ahead.
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