The following is the Reserve Bank of Australia’s statement after its July board meeting. The central bank today left the cash rate on hold at 4.1 per cent, in line with market pricing:
“At its meeting today, the board decided to leave the cash rate target unchanged at 4.1 per cent and the interest rate paid on exchange settlement balances unchanged at 4 per cent.
Interest rates have been increased by 4 percentage points since May last year. The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so. In light of this and the uncertainty surrounding the economic outlook, the board decided to hold interest rates steady this month. This will provide some time to assess the impact of the increase in interest rates to date and the economic outlook.
Inflation in Australia has passed its peak and the monthly CPI indicator for May showed a further decline. But inflation is still too high and will remain so for some time yet. High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment. For these reasons, the board’s priority is to return inflation to target within a reasonable timeframe.
Growth in the Australian economy has slowed and conditions in the labour market have eased, although they remain very tight. Firms report that labour shortages have lessened, yet job vacancies and advertisements are still at very high levels. Labour force participation is at a record high and the unemployment rate remains close to a 50-year low. Wages growth has picked up in response to the tight labour market and high inflation. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up.
The board remains alert to the risk that expectations of ongoing high inflation will contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very low rate of unemployment. Accordingly, it will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms.
The board is still expecting the economy to grow as inflation returns to the 2 per cent to 3 per cent target range, but the path to achieving this balance is a narrow one. A significant source of uncertainty continues to be the outlook for household consumption. The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending. While housing prices are rising again and some households have substantial savings buffers, others are experiencing a painful squeeze on their finances. There are also uncertainties regarding the global economy, which is expected to grow at a below-average rate over the next couple of years.
Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve. The decision to hold interest rates steady this month provides the board with more time to assess the state of the economy and the economic outlook and associated risks. In making its decisions, the board will continue to pay close attention to developments in the global economy, trends in household spending, and the forecasts for inflation and the labor market. The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
Here is a few articles we found that you can read more about the interest rate, inflation and the economy:
Read more about interest rates, inflation and the economy:
- RBA hits pause but warns it may raise rates again Concerns about CPI-linked pay rises and firms raising prices in line with inflation means more rate rises may be necessary.
- Three reasons why interest rates are still too low Despite the squeeze on consumer budgets from 12 interest rate rises, the economy has so far proven remarkably resilient.
- These three lenders are seeing the most home loan arrears A rise in delinquencies towards the middle of the year plays against trend, with arrears typically at their highest after the heavy spending Christmas period.
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