The Australian central bank struggles with the inflation outlook but sees risks tilting to the upside, even though they still think the inflation pressure is transitory

The latest decision of the Reserve Bank of Australia following the Monetary Policy Statement holds their key cash rate target at 3.6%.

But it is clear that the next shift will be up.

Financial market pricing currently indicates that any move won't be until the back end of 2026 and will likely be timid.

They are watching inflation and inflation expectations, in the hope they will moderate from 3.8% (October), with year-ahead expectations currently at 4.5% (October). Both are well above their policy objective of 2-3%, but the RBA reviewers are expecting a mellowing after "temporary factors" fall away.

The decision was unanimous

The RBA decision is here, and below.

It has to be said that the longer high actual inflation lasts, the harder it is for the central bank to claim "temporary factors". When they have a change of mind, financial markets will likely make punishing adjustments unless the policy signals are well communicated.

The RBA statement is below.

At its meeting today, the Board decided to leave the cash rate unchanged at 3.60 per cent.

While inflation has fallen substantially since its peak in 2022, it has picked up more recently. The Board’s judgement is that some of the recent increase in underlying inflation was due to temporary factors and there is uncertainty about how much signal to take from the monthly CPI data given it is a new data series. Nevertheless, the data do suggest some signs of a more broadly based pick-up in inflation, part of which may be persistent and will bear close monitoring.

Economic activity continues to recover. Growth in private demand has strengthened, driven by both consumption and investment. Activity and prices in the housing market are also continuing to pick up. Financial conditions have eased since the beginning of the year, credit is readily available to both households and businesses and the effects of earlier interest rate reductions are yet to flow through fully to demand, prices and wages. On the other hand, money market interest rates and government bond yields have risen more recently.

Various indicators suggest that labour market conditions remain a little tight. The unemployment rate has risen gradually over the past year and employment growth has slowed. However, measures of labour underutilisation remain at low rates, surveyed measures of capacity utilisation are above their long-run average and business surveys and liaison continue to suggest that a significant share of firms are experiencing difficulty sourcing labour. Wages growth, as measured by the Wage Price Index, has eased from its peak but broader measures of wages continue to show strong growth and growth in unit labour costs remains high.

There are uncertainties about the outlook for domestic economic activity and inflation and the extent to which monetary policy remains restrictive. On the domestic side, the pick-up in momentum has been stronger than anticipated, particularly in the private sector. If this continues, it is likely to add to capacity pressures. Uncertainty in the global economy remains significant but so far there has been minimal impact on overall growth and trade in Australia’s major trading partners.

Decision

The recent data suggest the risks to inflation have tilted to the upside, but it will take a little longer to assess the persistence of inflationary pressures. Private demand is recovering. Labour market conditions still appear a little tight but further modest easing is expected. The Board therefore judged that it was appropriate to remain cautious, updating its view of the outlook as the data evolve.

The Board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions. 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 is focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome.

Today’s policy decision was unanimous.