Australia's RBA lowers cash rate target to 4.10%; inflation easing

Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance, a statement by the RBA board noted.

In the December quarter underlying inflation was 3.2 per cent, which suggests inflationary pressures are easing a little more quickly than expected. There has also been continued subdued growth in private demand and wage pressures have eased.

These factors give the Board more confidence that inflation is moving sustainably towards the midpoint of the 2-3 per cent target range.

The gross domestic product (GDP) was weaker than expected, while the labour market is stronger.

The central bank considers local financial conditions to be restrictive, with interest rates above the neutral level.

However, upside risks remain. Some recent labour market data have been unexpectedly strong, suggesting that the labour market may be somewhat tighter than previously thought.

While today’s policy decision recognises the welcome progress on inflation, the board remains cautious on prospects for further policy easing.

Growth in output has been weak, private domestic demand is recovering a little more slowly than earlier expected, and there is uncertainty around the extent to which the recovery in household spending in late 2024 will persist, the statement noted.

Wage pressures have eased a little more than expected, housing cost inflation is abating, and businesses in some sectors continue to report that it has been hard to pass on cost increases to final prices.

Productivity growth has not picked up, which implies that growth in unit labour costs remains high.

There are notable uncertainties about the outlook for domestic economic activity and inflation.

The central projection is for growth in household consumption to increase as income growth rises. But there is a risk that any pick-up in consumption is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market than currently projected.

Alternatively, labour market outcomes may prove stronger than expected, given the signal from a range of leading indicators.

Uncertainty about the outlook abroad also remains significant. Geopolitical and policy uncertainties are pronounced and may themselves bear down on activity in many countries if households and firms delay expenditures pending greater clarity on the outlook.

The forecasts suggest that if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range, the bank added.

Fibre2Fashion News Desk (DS)