RBA extends rate pause despite inflation rebound, Bullock addresses economic outlook in first decision as Governor

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RBA extends rate pause despite inflation rebound, Bullock addresses economic outlook in first decision as Governor

The Reserve Bank of Australia (RBA) maintained its steady interest rates for the fourth consecutive month on Tuesday, despite a recent rebound in headline inflation. This decision marks the first monetary policy action under new RBA Governor Michele Bullock, who succeeded Philip Lowe last month. The cash rate remains unchanged at 4.10%, providing some respite for mortgage holders.

The Australian Bureau of Statistics reported a surge in headline inflation to 5.2% in August, primarily fueled by escalating housing, transport, and food costs. However, the RBA's decision to hold rates was largely anticipated by economists due to underlying inflation – the central bank's preferred measure – continuing to fall during the month and low consumer spending.

Governor Bullock stated that Australian inflation had passed its peak but remained too high and would persist for some time. She noted that while goods price inflation has eased, many services' prices continue to rise briskly, with fuel prices and rent inflation notably increasing.

The RBA pointed out that there is still "uncertainty surrounding the economic outlook," and this pause on moving the interest rate will provide more time to assess the impact of previous rate hikes. Over the past year until May, Australians faced four percentage points of rate increases, leaving many struggling to pay off their home loans. The last rate hike occurred in July as part of the RBA's efforts to control inflation amidst disappointing wage growth.

Governor Bullock also expressed concerns about Australia's near-record low unemployment rate. She suggested that the jobless rate might need to rise to about 4.5%, nearly a one per cent increase, to bring inflation under control.

The RBA's priority is to return inflation within a reasonable timeframe to its target range of 2-3%, according to Bullock. High inflation poses challenges for households and businesses and exacerbates income inequality. If high inflation becomes entrenched in people's expectations, reducing it later would be costly, involving even higher interest rates and a larger rise in unemployment.

The upcoming ABS employment data, set to be released in the next fortnight, will provide further insight into whether Australia's labor market remains a reason for caution. Some experts suggest that with underlying inflation still well above the target range, the RBA might need to raise rates again before the year-end.

Consumer confidence nationally rose by 1.8 points to 78.2 points, according to weekly data from ANZ and Roy Morgan, although it has now spent a record 31 straight weeks below the mark of 80. The increase was driven by improving levels of confidence about personal finances over the next 12 months and a more positive outlook on the long-term prospects for the Australian economy.

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