Timeline for inflation target ‘remains uncertain’ as RBA holds

The Reserve Bank of Australia (RBA) has decided to leave the official cash rate unchanged at 4.35 per cent during its March monetary policy meeting.

In the post-meeting statement by the RBA, the board stated that the “path of interest rates that will best ensure that inflation returns to target in a reasonable time frame remains uncertain and the Board is not ruling anything in or out.”

“Returning inflation to target within a reasonable time frame remains the Board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment. The Board needs to be confident that inflation is moving sustainably towards the target range.

“To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.”

Ahead of the decision, major bank economists unanimously expected the cash rate to hold steady, with Commonwealth Bank of Australia (CBA) economist Gareth Aird stating CBA expected “a very straightforward decision”.

The ASX rate tracker as of 18 March had predicted 95 per cent “no change” and a 5 per cent chance of a decrease to 4.1 per cent.

Speaking during the House of Representatives standing committee on 9 February, RBA governor Michele Bullock stated the Reserve Bank may consider cutting interest rates before inflation hits the target band of 2–3 per cent.

However, the board must still be confident that inflation will return to the target range before these rate cuts occur, Bullock clarified.

Westpac chief economist Luci Ellis and Aird currently expect rate cuts to begin during the September monetary policy meeting, while NAB’s economics team has stated that the pathway to any rate cuts at this time is “very difficult to judge”.

Speaking to Mortgage Business, AMP deputy chief economist Diana Mousina said AMP expects the RBA to begin cutting rates at the August meeting, if not earlier.

“We had been saying June but [that’s] probably getting a little bit too soon, they just don’t seem like they’re in a rush just yet. So, probably they’ll start cutting rates by about August, which is still ahead of market pricing,” Mousina added.

Reacting to the decision, CreditorWatch’s chief economist Anneke Thompson said the RBA leaving the cash rate unchanged came as “no surprise” due to the lack of “any meaningful data pointing to the economy continuing to overheat and further threaten inflation rises”.

“In fact, National Accounts data released earlier in the month provided solid evidence that monetary policy tightening is having its intended impact on domestic demand,” Thompson added.

“While interest rates remain at 4.35 per cent, consumers will continue to hold back on spending on discretionary items, and this will further negatively impact retail trade, but overall, will help bring inflation down.”

PropTrack senior economist Eleanor Creagh said it’s likely the cash rate has peaked in this current tightening cycle.

“Home prices in 2023 remained resilient to the higher interest rate environment and the improvement in conditions that materialised through 2023 has continued in 2024,” Creagh said.

Creagh added that the decision to hold will “maintain both buyer and seller confidence” with the next move for interest rates “likely to be down”.

“Despite a weaker outlook for the economy, the positive tailwinds for housing demand and a slowdown in the completion of new homes are likely to offset the impact of reduced affordability and a slowing economy,” Creagh said.

“As a result, prices are expected to lift further in the months ahead, particularly while the expectation remains that interest rates will move lower in late 2024.”

CoreLogic research director Tim Lawless said the hold along with a growing expectation that rates will ease later this year should provide a further lift in confidence in the housing market.

“Historically we have seen a close relationship between consumer sentiment and the volume of home sales.

“Following the 6.2 per cent rise in the February consumer sentiment reading from Westpac and the Melbourne Institute, a further lift in confidence could be accompanied by a rise in home purchasing.

“This could add to housing demand that has already remained quite resilient despite the higher interest rate environment and cost-of-living pressures,” Lawless said.

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