Central Bank leaves rates unchanged in September

Hold meets market expectations: At its meeting on 23–24 September, the Reserve Bank of Australia (RBA) decided to keep the official cash rate (OCR) at 4.35%, meeting market expectations and marking the seventh consecutive hold since late-2023. Moreover, the Bank left the interest rate on exchange settlement balances at 4.25%.

Sticky inflation and strong labor market drive decision: The decision to stand pat primarily reflected sticky above-target inflation: Despite receding from 2022’s peak, price pressures remained entrenched above the RBA’s 2.0–3.0% target through Q2. Moreover, the Bank noted that it does not forecast inflation to return to target before end-2025 and that consumer demand remains resilient in spite of tight borrowing conditions. The RBA also highlighted persistent upside risks to the inflationary outlook. The Bank also stood pat due to the ongoing strength in the labor market, including strong employment growth and a record-high participation rate.

Easing cycle set to start in 2025: In its communiqué, the Bank restated its commitment to returning inflation to the target range and stated that “policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range”. That said, the RBA was slightly more dovish than in past meetings and, in a subsequent statement, Governor Michele Bullock hinted that it remains unlikely the Bank will embark on a monetary policy loosening cycle in the near term. An overwhelming majority of our panelists expect the OCR to be kept at its current level until end-2024 before the RBA reduces it by 50–125 basis points in 2025. The Bank will convene next on 4–5 November.

Panelist insight: Nomura’s Andrew Ticehurst and David Seif commented: “The board’s press release remained somewhat hawkish, with the focus still on returning inflation to target […] and indicating it would not be persuaded by a temporary decline in headline CPI due to government cost of living subsidies. […] Our RBA views are unchanged; we continue to forecast a gentle easing cycle, with 25bp rate cuts in February, May and August 2025, returning monetary policy to a roughly neutral setting.” Sue Ann Lee, economist at the United Overseas Bank, was more dovish: “The RBA has incorporated the effects [of energy rebates] into its headline inflation outlook. And given the RBA’s focus on underlying inflation measures, the latest slew of CPI data for Aug is definitely an encouraging progress towards the RBA’s 2%-3% target band. If the deceleration in trimmed mean inflation continues into Sep and 3Q24 quarterly readings, this may prompt the RBA to cut on 5 Nov, which remains our base case.”

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