Australia’s central bank, the Reserve Bank of Australia (RBA), has opted to maintain its key interest rate at 4.35% following a recent Reuters poll of economists. The decision aligns with ongoing economic trends marked by resilient activity coupled with persistent core inflation. Consumer price inflation saw a decline to 2.8% in the previous quarter, achieving the RBA’s target range of 2-3% for the first time in three years. However, the more stable core inflation remains worrisome and elevated, compelling the RBA to take a cautious stance in its monetary policy.
The RBA has engaged in a tightening cycle post-COVID, implementing a substantial rate hike of 425 basis points, climbing from a historical low of 0.10% to the current rate of 4.35%. This approach, though less aggressive than many global counterparts, reflects the RBA’s commitment to fostering job creation—a primary component of its mandate. Unemployment rates have remained stable between 4.0% and 4.2% since April, indicating a robust employment market, which plays a critical role in shaping the RBA’s policy decisions.
Economic Outlook and Future Rate Decisions
As indicated in the October 30-31 poll involving 30 economists, expectations are firmly set on the RBA maintaining its interest rate at 4.35% during the upcoming two-day policy meeting on November 5. The consensus shows that nearly all economists predict the RBA will refrain from any rate alterations at its December meeting as well. Craig Vardy from BlackRock Australasia underscored this sentiment, noting that while no changes in rates are anticipated, a shift in the RBA’s communication style from a hawkish stance towards a more balanced outlook could signal a subtle but important change in tone.
Reflecting on projections for 2025, local banking giants such as ANZ, CBA, NAB, and Westpac share a consensus that no rate changes will occur this year. However, many predict a potential rate cut during the first meeting of 2025 in February. Out of the economists surveyed, approximately 70% expect a reduction of 25 basis points, which would bring the rate down to 4.10%. This predictive analysis also reveals diverging views, with some economists skeptical about the timing of such cuts, suggesting that market sentiment may not align with forthcoming monetary adjustments.
The Core Inflation Conundrum
Economists predict that core inflation will not stabilize within the desired target band until the latter part of Q3, presenting a complicated scenario for the RBA. My Bui, an economist at AMP, articulated that the central bank will likely avoid significant rate cuts without the onset of a recession. Essentially, the RBA is expected to tread cautiously, introducing only a gradual shift in policy. A prevailing belief among economists is that adjusting interest rates back to a more normalized level would place them slightly above 3%.
This perspective complicates the forecast for monetary policy adjustments, especially when comparing Australia’s situation to the more aggressive rate reductions anticipated by the U.S. Federal Reserve. Consequently, market analysts forecast a potential rebound of the Australian dollar, which has seen a year-to-date decline of 3.5%. The currency is expected to recover fully by the end of January of the following year, stabilizing around $0.68.
The RBA is currently positioned within a dynamic economic landscape characterized by cautious policymaking. With the outlook suggesting no immediate rate changes and an emphasis on core inflation management, the central bank faces an intricate balancing act. Its ability to navigate these economic currents will be pivotal not only for Australia’s financial stability but also for broader economic confidence. As 2025 approaches, stakeholders await clearer indications regarding the RBA’s trajectory in interest rate adjustments, reflecting both local economic conditions and global financial trends.