The Reserve Bank of Australia (RBA) has decided to hold the official cash rate at 4.35%, in a move that was widely anticipated by economists and the market.

This now marks the seventh time the RBA has held the cash rate since its last hike almost a year ago during the November monetary policy meeting and the longest consecutive string of cash rate holds since the pandemic.

Following the decision, the board’s statement read: “In year-ended terms, underlying inflation has been above the midpoint of the target for 11 consecutive quarters and has fallen very little over the past year.

“Sustainably returning inflation to target within a reasonable timeframe remains the board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment. To date, longer term inflation expectations have been consistent with the inflation target and it is important that this remain the case.”

The board further stated that while headline inflation will “decline for a time”, underlying inflation is “more indicative of inflation momentum, and it remains too high”.

“The most recent projections in the August SMP show that it will be some time yet before inflation is sustainably in the target range.

“Data since then have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the board is confident that inflation is moving sustainably towards the target range.”

The RBA reiterated its stance that it will continue to rely on data and the evolving assessment of risks to guide its decisions and that it remains “resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome”.

There are a couple of reasons why the Reserve Bank decided to keep the cash rate on hold in September.

The latest economic data from the Australian Bureau of Statistics (ABS) revealed that annual economic growth over the June quarter was the slowest since the 1991-92 financial year, suggesting that current interest rates are putting downward pressure on Australia’s economic growth.

ABS data also showed that inflation is continuing to ease, with the monthly CPI indicator rising 3.5% for the 12 months to July, down from 3.8% in the 12 months to June. The RBA’s best tool to drive inflation towards its target range of 2-3% is the cash rate, so while inflation is trending in the right direction, it’s still not low enough for the RBA to consider cutting the cash rate yet.”

The decision today was also “unsurprising” due to the steady nature of inflation and labour force data.

Both measures are performing broadly as the RBA had forecast, and are not currently presenting it with any need to alter its thinking around the timing of the first cut to the cash rate.

The most significant change in developments this month was the US Federal Reserve’s somewhat surprising 50 basis point cut to the US cash rate. The major message that this cut sent is that the world’s biggest economy is perhaps slowing faster than first thought.

If the data continues its current trajectory of slowly softening, then the RBA is unlikely to change course and the first cut is unlikely to be before the year is out. However, one soft unemployment report could change this thinking quite rapidly.

Households are under pressure and retail sales and consumption are weak, while consumer sentiment remains low. Though employment growth has remained strong, and the unemployment rate held steady at 4.2% in August, the labour market has softened over the past year.

Despite recent data showing the economy is tracking through a period of weak growth, the sustained pause reflects the RBA’s desire to keep inflation on its path back to target, while balancing downside risks for growth and the labour market.

With inflation still being relatively higher than the RBA would like, he expects no change in the cash rate for the remainder of 2024 as the RBA “solidify any gains made this year and not spark inflationary pressure prior to Christmas.

We may see the first rate cut in February next year, however, the banks may not pass on any reduction in full, as they will be striving to recover margins.

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