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The Reserve Bank of Australia has announced its decision on the cash rate target after stronger than expected inflation data in March.
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RBA announces cash rate decision amid mixed inflation data
07 May 2024
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10 minute read
The Reserve Bank of Australia (RBA) today announced its decision to leave the cash rate on hold at 4.35 per cent.
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The announcement today follows stronger than expected inflation data for the first quarter of the year, which points to a “concerning path ahead for Australia's disinflation cycle”, according to BIS Oxford Economics head of macroeconomic forecasting Sean Langcake
“Price pressures are broad, as evidenced by the increase in trimmed mean inflation and elevated unit labour cost growth will keep upward pressure on inflation,” said Langcake.
“But we expect the RBA will stay the course and keep rates on hold until late 2024. Demand growth is clearly weak, which will eventually translate to slower inflation. A hike in response to the inflation data would be a big change their reaction function.”
RSM Australia economist Devika Shivadekar said that concerns among policymakers about persistent inflation are well-founded.
"Our base case is for the RBA to pivot in 3Q24 but we acknowledge the increasing risk of that being pushed into 4Q24," said Shivadekar.
"Upside risks to inflation stem from rising fuel prices from geopolitical tensions and potential inflationary effects of the Federal Budget and Stage 3 tax cuts."
CreditorWatch chief economist Anneke Thompson noted that goods inflation continues to fall at a comfortable pace, and is now almost back into the target band, at 3.1 per cent.
“Services inflation, unfortunately, is proving harder to nudge down, and only decreased by 0.3 per cent over the March quarter, to now sit at 4.3 per cent,” said Thompson.
“Despite this, the RBA is no doubt well aware that the cash rate has far less impact on services inflation than it does on goods inflation, and thus a further increase would do little to help move services inflation into the band at a faster pace.”
Thompson said the Australian Bureau of Statistics’ (ABS’) latest retail sales data shows that businesses in the discretionary retail and food and beverage sectors will continue to bear the brunt of tight monetary policy, as consumers choose, or indeed are forced to, pull back spending in these areas.
“It is likely that the next few months’ employment figures will have a key influence on any future cash rate decision that the RBA makes,” she said.
“Proponents for further tightening of monetary policy point to sticky services inflation as a key reason to increase the cash rate further, while those that refute this argument highlight falling goods inflation and flatlining retail sales as evidence that monetary policy is tight enough.”
The credit agency said the various measures of the labour force data released by the ABS monthly will give the RBA a good yardstick as to which way this argument should fall over the next few months.
“Even moderate softening of the employment market will likely mean that we are at the peak of this tightening cycle, as smaller businesses and many household businesses will now be in precarious financial positions given the high cost of debt,” said Thompson.
“The RBA is unlikely to risk further damage to sectors of the economy that are least able to cope with it.”
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