| Consensus | Actual | Previous | |
|---|---|---|---|
| Change | 0bp | 0bp | 25bp |
| Level | 4.10% | 4.10% | 4.10% |
Highlights
The Reserve Bank of Australia left its main policy rate, the cash rate, unchanged at 4.10 percent, as largely expected, after unexpectedly raising the rate by 25 basis points last month. But the bank indicated that its battle against stubbornly high inflation is not yet over as Australia's consumer prices rose 5.6 percent on the year in May, well above the bank's medium-term inflation target of between 2 and 3 percent.
"The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so," Governor Philip Lowe said in a statement."In light of this and the uncertainty surrounding the economic outlook, the Board decided to hold interest rates steady this month."
Looking ahead, the governor repeated his recent mantra,"Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve."
"The decision to hold interest rates steady this month provides the board with more time to assess the state of the economy and the economic outlook and associated risks," he said.
Except for a pause in April, RBA policymakers have now increased policy rates at every meeting since the start of their current tightening cycle in May last year, with the cumulative amount of rate increases now at 400 basis points.
"Inflation in Australia has passed its peak and the monthly CPI indicator for May showed a further decline," Lowe said."But inflation is still too high and will remain so for some time yet."
In monthly CPI data, the annual inflation rate eased to 5.6 percent in May after ticking up to 6.8 percent in April from 6.3 percent, and has moderated from the recent peak of 8.4 percent hit in December 2022. In the January-March quarter the consumer price index rose 7.0 percent on year, easing from 7.8 percent the previous quarter.
"Growth in the Australian economy has slowed and conditions in the labour market have eased, although they remain very tight," Lowe said, repeating his assessment provided in June.
Firms report that labour shortages have lessened, yet job vacancies and advertisements are still at very high levels while labour force participation is at a record high and the unemployment rate remains close to a 50-year low, he noted.
"Wages growth has picked up in response to the tight labour market and high inflation. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up," said the governor.
The board will continue to keep a close watch on both the evolution of labour costs and the price-setting behaviour of firms, he said.
As for downside risks to growth, Lowe maintained his view, saying,"The board is still expecting the economy to grow as inflation returns to the 2 to 3 percent target range, but the path to achieving this balance is a narrow one."
The main source of uncertainty remains the outlook for consumer spending, which has been slowing amid higher borrowing costs and elevated prices for daily necessities.
"While housing prices are rising again and some households have substantial savings buffers, others are experiencing a painful squeeze on their finances," Lowe said, repeating his June statement."There are also uncertainties regarding the global economy, which is expected to grow at a below-average rate over the next couple of years."
"The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so," Governor Philip Lowe said in a statement."In light of this and the uncertainty surrounding the economic outlook, the Board decided to hold interest rates steady this month."
Looking ahead, the governor repeated his recent mantra,"Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve."
"The decision to hold interest rates steady this month provides the board with more time to assess the state of the economy and the economic outlook and associated risks," he said.
Except for a pause in April, RBA policymakers have now increased policy rates at every meeting since the start of their current tightening cycle in May last year, with the cumulative amount of rate increases now at 400 basis points.
"Inflation in Australia has passed its peak and the monthly CPI indicator for May showed a further decline," Lowe said."But inflation is still too high and will remain so for some time yet."
In monthly CPI data, the annual inflation rate eased to 5.6 percent in May after ticking up to 6.8 percent in April from 6.3 percent, and has moderated from the recent peak of 8.4 percent hit in December 2022. In the January-March quarter the consumer price index rose 7.0 percent on year, easing from 7.8 percent the previous quarter.
"Growth in the Australian economy has slowed and conditions in the labour market have eased, although they remain very tight," Lowe said, repeating his assessment provided in June.
Firms report that labour shortages have lessened, yet job vacancies and advertisements are still at very high levels while labour force participation is at a record high and the unemployment rate remains close to a 50-year low, he noted.
"Wages growth has picked up in response to the tight labour market and high inflation. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up," said the governor.
The board will continue to keep a close watch on both the evolution of labour costs and the price-setting behaviour of firms, he said.
As for downside risks to growth, Lowe maintained his view, saying,"The board is still expecting the economy to grow as inflation returns to the 2 to 3 percent target range, but the path to achieving this balance is a narrow one."
The main source of uncertainty remains the outlook for consumer spending, which has been slowing amid higher borrowing costs and elevated prices for daily necessities.
"While housing prices are rising again and some households have substantial savings buffers, others are experiencing a painful squeeze on their finances," Lowe said, repeating his June statement."There are also uncertainties regarding the global economy, which is expected to grow at a below-average rate over the next couple of years."
Market Consensus Before Announcement
With inflation too high amid uncertainty over how long it would take to come down, the Reserve Bank of Australia unexpectedly raised rates by 25 basis points at its June meeting. For the July meeting, the bank is expected to hold policy steady.
Definition
The Reserve bank of Australia (RBA) announces its monetary policy with regard to interest rates on the first Tuesday of each month with the exception of January when it is on vacation. The RBA is the central bank of Australia and its duty is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. It does this by setting the cash rate to meet an agreed medium-term inflation target, working to maintain a strong financial system and efficient payments system.
Description
The Reserve Bank of Australia's (RBA's) main responsibility is monetary policy. Policy decisions are made by the Reserve Bank Board with the objective of achieving low and stable inflation over the medium term. Other responsibilities include maintaining financial system stability, while at the same time promoting the safety and efficiency of the payments system. The RBA regards appropriate monetary policy as a major factor contributing to the Australian dollar's stability, which in turn leads to full employment and the economic prosperity for Australia.
The RBA is unique among the central banks - it has two boards with complementary responsibilities. The Reserve Bank Board is responsible for monetary policy and overall financial system stability. The Payments System Board has specific responsibility for the safety and efficiency of the payments system.
The RBA sets an interest rate at which it lends to financial institutions. This interest rate then affects the whole range of interest rates set by commercial banks and other institutions for their own savers and borrowers. It also tends to affect the price of financial assets, such as bonds and shares, and the exchange rate, which affect consumer and business demand in a variety of ways. Lowering or raising interest rates affects spending in the economy.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
The RBA is unique among the central banks - it has two boards with complementary responsibilities. The Reserve Bank Board is responsible for monetary policy and overall financial system stability. The Payments System Board has specific responsibility for the safety and efficiency of the payments system.
The RBA sets an interest rate at which it lends to financial institutions. This interest rate then affects the whole range of interest rates set by commercial banks and other institutions for their own savers and borrowers. It also tends to affect the price of financial assets, such as bonds and shares, and the exchange rate, which affect consumer and business demand in a variety of ways. Lowering or raising interest rates affects spending in the economy.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
