RBA holds rates steady amid moderating inflation
The Reserve Bank of Australia (RBA) board left the cash rate on hold at 4.35 per cent last week, in line with market expectations. The decision was made off the basis that “inflation continues to moderate, but remains high.”
Inflation continues to moderate in line with their expectations, although the RBA has not ruled out further intervention when and if required. Uncertainty is clouding the RBA’s success in curbing inflation thus far, as numerous factors could threaten their efforts to date. Whilst the data pointing to the slowing rate of inflation is currently favourable, any further stimulus by way of wage growth, in particular, could curb the work done by the RBA thus far. Increasing purchasing and consumption capacity could cause more turbulence on the road to reaching the 2-3 per cent target range.
At this stage, the higher interest rate environment is proving to establish a more sustainable balance between aggregate supply and demand. The cost pressures are weighing on household consumption as people’s real incomes are being stretched. Although, as has been previously flagged, services inflation remains elevated and is moderating at a slower pace when compared to goods inflation.
The medium-term inflation outlook appears to be on target and in line with the RBA’s target. The RBA’s forecasts have inflation returning to the target range in 2025 and hitting the midpoint in 2026. They will continue to pay close attention to development abroad and domestically, to ensure they stay on the path.
Clear messaging from the RBA has left the potential for further intervention on the table, “The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out.”
It appears that the RBA is looking for sustained, consistent proof that inflation is, in fact being revised downwards in response to their intervention to date. It may take some time before the RBA is convinced that that there is a consistent trend within the data and they can confidently assume that there is a steady downward trend in the rate of inflation.
Brett Craig is responsible for portfolio management and asset origination for the Aura High Yield SME Fund and the Aura Core Income Fund. Prior to joining Aura Group, Brett held a number of roles at Macquarie Group over an 11 year period including Vice President within the Debt Markets business where he focused on originating, structuring and distributing debt products primarily in the Australian market.
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