RBA keeps interest rates at 4.35%

The Reserve Bank of Australia (RBA) has left the cash rate target unchanged at 4.35%.

According to the central bank, 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.

“Measures of underlying inflation are around 3.5%, which is still some way from the 2.5% midpoint of the inflation target,” it says.

“The most recent forecasts published in the November Statement on Monetary Policy (SMP) do not see inflation returning sustainably to the midpoint of the target until 2026. The Board is gaining some confidence that inflationary pressures are declining in line with these recent forecasts, but risks remain.”

Retailers respond

The Australian Retailers Association (ARA) says the RBA’s decision is a missed opportunity to provide much-needed relief for households and businesses facing financial pressures across the festive season.

ARA Chief Industry Affairs Officer Fleur Brown says retailers continue to face the dual challenges of subdued consumer spending and rising business costs.

“Small businesses are particularly vulnerable, grappling with rising costs in all areas, and continuing to feel the squeeze from economic pressures,” she says.

“With the peak trading period now underway, where many discretionary retailers make up to two thirds of their annual profit, a rate cut would have provided retailers with renewed confidence across Christmas and the New Year.

“Retailers have been investing significantly in the Christmas season, from hiring additional staff to introducing new products and festive store displays.

“Retailers employ one in 10 Australians and as a sector, contribute 18% of our national gross domestic product (GDP). The holiday season is crucial to ensure retailers can weather the slower months ahead.

“Retailers also employ tens of thousands of casual workers over this time, providing an important source of additional income for many Australians.”

Ms Brown adds that the ARA will continue to advocate for relief measures from the federal government to support the sector.

“We urgently need action to ensure Australia’s $430 billion retail economy not only survives but thrives,” she says.

“It’s vital that retailers – both small and large – are given the confidence to continue investing in their businesses through the critical months ahead.”

Looking ahead

Taking account of recent data, the RBA says its assessment is that monetary policy remains restrictive and is working as anticipated.

“Some of the upside risks to inflation appear to have eased and while the level of aggregate demand still appears to be above the economy’s supply capacity, that gap continues to close,” it says.

“The central projection is for growth in household consumption to increase as income growth rises. September quarter data suggest that both incomes and consumption had recovered a little slower than forecast, but more recent information has suggested a pick-up in consumption in October and November. 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.

“More broadly, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slow growth in the economy and weak productivity outcomes at a time of excess demand, and while conditions in the labour market remain tight.”

The RBA says, “sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority”.