The Reserve Bank has opted to maintain interest rates while forecasting that inflation will remain within its target range of 2-3 per cent until mid-next year. This stability is anticipated to shift as the federal government phases out energy rebates, which are currently helping to keep inflation in check. At its second last meeting of the year, the bank decided to keep the official cash rate at 4.35 per cent, marking a year since the last increase. Market analysts had widely predicted this decision, with no changes expected until at least February.
Recent forecasts indicate that headline inflation, which dipped to a three-year low of 2.8 per cent in the September quarter, may decrease further. The Reserve Bank projects that by mid-2025, inflation could settle at 2.5 per cent, aligning with its mid-point target. However, if energy rebates are discontinued, inflation could rise to 3.7 per cent by the end of next year before gradually returning to the target of 2.5 per cent by the close of 2026.
While the bank expects headline inflation to remain subdued for a while, underlying inflation is projected to remain elevated, not easing to the 3 per cent mark until mid-2025. The quarterly monetary policy statement from the bank indicates that the economy continues to operate above its productive capacity without contributing to inflation, although conditions are beginning to relax.
The Reserve Bank expressed that it aims for inflation to remain sustainably within its target band before considering any rate cuts. Over the past decade, inflation has only stayed within this target range for about 10 per cent of the time. The bank highlighted that government spending, particularly through aged care and the National Disability Insurance Scheme, has contributed to economic growth, and anticipates public spending will continue to be strong in the coming years.
Despite a predicted decline in public spending in the short term, this downturn is seen as temporary due to announced investment spending in government budgets and a considerable backlog of engineering projects. In contrast, business investment is expected to stagnate by the end of the year, with only modest improvements anticipated thereafter.
Household spending has been weaker than the bank initially expected, having recorded a negative figure in the June quarter. The Reserve Bank noted that households are becoming more budget-conscious, cutting back on non-essential expenses, opting for cheaper alternatives, and waiting for sales before making purchases. Spending on experiences, dining out, and holidays has also seen a decline as households adjust their financial strategies.
Despite the implementation of stage 3 tax cuts, which some economists believed would spur increased consumer spending, the bank now suggests that more of these funds will be saved rather than spent.
The job market continues to outperform expectations, with employment growth forecasted to remain strong over the next year, and unemployment expected to peak at around 4.5 per cent by late 2025, up from the current rate of 4.1 per cent. However, the Reserve Bank has noted that businesses are scaling back their hiring intentions, which have fallen below long-term averages, as companies focus on managing costs and enhancing productivity in response to reduced demand.
While energy rebates have temporarily lowered headline inflation, the Reserve Bank anticipates that falling petrol prices and an earlier-than-expected slowdown in rent increases will also help to curb price growth. Despite the persistence of high housing construction costs, various factors indicate a loosening rental market. This reflects a deceleration in demand for housing, driven by increased average household sizes, likely due to affordability issues, alongside slower population growth.
The bank also noted that population growth might decelerate more quickly than previously expected, partly due to changes in federal policies affecting foreign student visas. While some analysts have suggested that a slowdown in population growth could alleviate inflationary pressures, the Reserve Bank cautioned that the lack of migration may hinder the economy’s ability to supply the goods and services needed by the current population.
