Inflation ‘digging in its heels’, keeping RBA on toes

Stalling progress on inflation has the Reserve Bank of Australia on high alert and pushing back on expectations of a near-term interest rate cut.

Australia’s central bank on Tuesday struck a hawkish tone as it kept interest rates on hold, as was widely expected, warning “data have reinforced the need to remain vigilant to upside risks to inflation”.

Governor Michele Bullock tempered market expectations of an imminent start to easing, in part fuelled by market volatility, stating “a near-term reduction in the cash rate doesn’t align with the board’s current thinking”.

The outlook for underlying inflation – which the central bank highlights as government cost-of-living support swings the headline numbers around – was upgraded a little over the forecasting period.

Tuesday’s statement of monetary policy showed slight upgrades to the trimmed mean forecasts and longer wait to reach 2.6 per cent – just shy of the middle of the two-three per cent target, where the RBA is aiming for.

Today’s welcome decision to keep interest rates on hold recognises that Australians are under pressure, as well as the significant progress we’ve made on underlying inflation, softness in our economy and the substantial uncertainty and volatility around the world #auspol #ausecon

— Jim Chalmers MP (@JEChalmers) August 6, 2024

Growth forecasts had also been bumped higher, reflecting stronger public demand and household consumption.

Moody’s Analytics economist Harry Murphy Cruise said there was clearly “growing angst within the bank that inflation is digging in its heels”.

“We’re still of the view that it’s more time, not more hikes that’s needed to tame inflation; we expect the cash rate to stay where it is until February 2025,” he said.

Market movements unlikely factored into Tuesday’ call, Mr Murphy Cruise said, with the board more focused on June quarter inflation data.

Welcoming the RBA’s decision to keep interest rates on hold, Treasurer Jim Chalmers said Australia was not immune to global developments in financial markets.

“The market volatility that we’ve seen has been driven by weaker than expected jobs growth and tech earnings in the US, as well as rising Japanese interest rates impacting Asian markets as well,” he said on Tuesday.

Dr Chalmers had asked Treasury to keep him up‑to‑date on developments as they unfolded.

Shadow Treasurer Angus Taylor said it was clear inflation was “running the economy, not the economy”.

“If the government had broken the back of inflation, we wouldn’t be in this situation,” he told reporters on Tuesday.

This post was originally published on Michael West.