The Reserve Bank of Australia (RBA) has kept interest rates on hold at 4.35 per cent at its May meeting, but cautioned that higher than expected inflation was not expected to return to the target 2-3 per cent range until the second half of 2025.
In her monetary policy statement after today’s RBA Board meeting, Governor Michele Bullock, also said the midpoint of the target inflation range would not be met until 2026.
“The economic outlook remains uncertain and recent data have demonstrated that the process of returning inflation to target is unlikely to be smooth,” she said.
“In the near term, inflation is forecast to be higher because of the recent rise in domestic petrol prices, and higher than expected services price inflation, which is now forecast to decline more slowly over the rest of the year. Inflation is, however, expected to decline over 2025 and 2026.”
Ms Bullock said inflation continued to moderate, but had declined more slowly than expected, with CPI growing 3.6 per cent in the year to the March quarter.
Underlying inflation was higher than headline inflation and declined by less.
“This was due in large part to services inflation, which remains high and is moderating only gradually,” Ms Bullock said.
“Higher interest rates have been working to bring aggregate demand and supply somewhat closer towards balance.
“But the data indicate continuing excess demand in the economy, coupled with strong domestic cost pressures, both for labour and non-labour inputs.”
Ms Bullock noted that conditions in the labour market had eased over the past year, but still remained tighter than what is consistent with sustained full employment and inflation at target.
“Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth,” she said.
“Meanwhile, inflation is still weighing on people’s real incomes and output growth has been subdued, reflecting weak household consumption growth.”
The Board noted that the economic outlook remained “highly uncertain”, especially when it comes to the persistence of services inflation.
“It is expected to ease more slowly than previously forecast, reflecting stronger labour market conditions including a more gradual increase in the unemployment rate and the broader underutilisation rate.
“Growth in unit labour costs also remains very high.
“It has begun to moderate slightly as measured productivity growth picked up in the second half of last year.
“This trend needs to be sustained over time if inflation is to continue to decline.”
Ms Bullock also noted household consumption growth had been particularly weak as high inflation and earlier rises in interest rates had affected disposable income.
“More broadly, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand, and while the labour market remains tight,” she said.
She said returning inflation to target remained the Board’s “highest priority” and refused to rule out future interest rate hikes.
“Recent data indicate that, while inflation is easing, it is doing so more slowly than previously expected and it remains high,” Ms Bullock said.
“The Board expects that it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks.
“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.”
