In a speech, Reserve Bank of Australia (RBA) Governor Michele Bullock reaffirmed that it remains premature to consider near-term rate cuts, emphasizing that the central bank’s focus continues to be on managing inflation.
Her remarks came amid a backdrop of weak economic growth and mixed inflation data. Governor Bullock reiterated that the RBA’s top priority is to bring inflation down to its target range of 2-3%.
Despite a monthly consumer price index report showing that headline inflation had eased to 3.5% in July, she cautioned that inflationary pressures persist, particularly in housing and market services.
Bullock stressed that these factors contribute to core inflation remaining above the target band, which is not expected to be achieved until late 2025.
“If the economy evolves broadly as anticipated, the board does not expect that it will be in a position to cut rates in the near term,” Bullock stated.
Her comments reflect a continued commitment to a hawkish stance on monetary policy, even as recent data reveals that the Australian economy is struggling to gain momentum.
Australian economy struggles
Recent economic data indicates that Australia’s economy barely grew in the second quarter of 2024, with household consumption acting as a drag on overall growth.
This sluggish performance has fueled market speculation about potential rate cuts, but Bullock’s speech underscores the central bank’s reluctance to shift its policy stance prematurely.
The RBA has maintained the cash rate at 4.35% since November 2023, a level deemed restrictive enough to achieve its inflation target while also supporting employment gains.
However, Bullock warned that if high inflation becomes entrenched in expectations, the central bank might need to take more drastic measures to control it, potentially slowing the economy further.
Markets anticipate potential rate cuts
Despite the RBA’s current position, market participants are still forecasting a 42% probability that the central bank could implement a rate cut in November.
This expectation is partly influenced by anticipated policy adjustments by the US Federal Reserve and other major central banks, which are also expected to ease their monetary policies in the near term.
Bullock acknowledged the uncertainty surrounding the RBA’s economic forecasts but emphasized that any decision to adjust rates would be based on evolving economic conditions.
She noted that while inflation for retail goods is nearing its historical average and administered prices are only slightly above long-run averages, rent inflation and labour costs continue to exert upward pressure on overall inflation.
Governor highlights persistent inflation pressures
Bullock highlighted that rent inflation is likely to remain elevated for an extended period, while labour cost growth remains robust.
The combination of rising wages and weak productivity growth contributes to the ongoing inflationary pressures that the RBA is striving to manage.
“Ultimately, it is crucial to remember that our full employment goal is not served by letting inflation stay above target indefinitely,” Bullock stated.
Her comments underscore the central bank’s commitment to achieving its inflation objectives, even if it means maintaining a restrictive monetary policy for the foreseeable future.
In summary, while market expectations suggest that rate cuts may be on the horizon, Bullock’s speech reaffirmed the RBA’s cautious approach.
The central bank remains focused on addressing persistent inflationary pressures and is prepared to adjust its policy stance as necessary based on future economic developments.
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