At its meeting today, the Board decided to raise the cash rate target by 25 basis points to
4.35 per cent. It also increased the interest rate paid on Exchange Settlement balances by
25 basis points to 4.25 per cent.
Inflation in Australia has passed its peak but is still too high and is proving more persistent than
expected a few months ago. The latest reading on CPI inflation indicates that while goods price inflation
has eased further, the prices of many services are continuing to rise briskly. While the central forecast
is for CPI inflation to continue to decline, progress looks to be slower than earlier expected. CPI
inflation is now expected to be around 3½ per cent by the end of 2024 and at the top of the
target range of 2 to 3 per cent by the end of 2025. The Board judged an increase in
interest rates was warranted today to be more assured that inflation would return to target in a
reasonable timeframe.
The Board had held interest rates steady since June following an increase of 4 percentage points
since May last year. It had judged that higher interest rates were working to establish a more
sustainable balance between supply and demand in the economy. Furthermore, it had noted that the impact
of the more recent rate rises would continue to flow through the economy. It had therefore decided that
it was appropriate to hold rates steady to provide time to assess the impact of the increase in interest
rates so far. In particular, the Board had indicated that it would be paying close attention to
developments in the global economy, trends in household spending, and the outlook for inflation and the
labour market.
Since its August meeting, the Board has received updated information on inflation, the labour market,
economic activity and the revised set of forecasts. The weight of this information suggests that the risk
of inflation remaining higher for longer has increased. While the economy is experiencing a period of
below-trend growth, it has been stronger than expected over the first half of the year. Underlying
inflation was higher than expected at the time of the August forecasts, including across a broad range of
services. Conditions in the labour market have eased but they remain tight. Housing prices are continuing
to rise across the country.
At the same time, high inflation is weighing on peoples real incomes and household consumption
growth is weak, as is dwelling investment. Given that the economy is forecast to grow below trend,
employment is expected to grow slower than the labour force and the unemployment rate is expected to rise
gradually to around 4¼ per cent. This is a more moderate increase than previously forecast.
Wages growth has picked up over the past year but is still consistent with the inflation target, provided
that productivity growth picks up.
Returning inflation to target within a reasonable timeframe remains the Boards priority. High
inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the
value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens
income inequality. And if high inflation were to become entrenched in peoples expectations, it
would be much more costly to reduce later, involving even higher interest rates and a larger rise in
unemployment. To date, medium-term inflation expectations have been consistent with the inflation target
and it is important that this remains the case.
There are still significant uncertainties around the outlook. Services price inflation has been
surprisingly persistent overseas and the same could occur in Australia. There are uncertainties regarding
the lags in the effect of monetary policy and how firms pricing decisions and wages will respond to
the slower growth in the economy at a time when the labour market remains tight. The outlook for
household consumption also remains uncertain, with many households experiencing a painful squeeze on
their finances, while some are benefiting from rising housing prices, substantial savings buffers and
higher interest income. And globally, there remains a high level of uncertainty around the outlook for
the Chinese economy and the implications of the conflicts abroad.
Whether further tightening of monetary policy is required to ensure that inflation returns to target in a
reasonable timeframe will depend upon the data and the evolving assessment of risks. In making its
decisions, the Board will continue to pay close attention to developments in the global economy, trends
in domestic demand, and the outlook for inflation and the labour market. The Board remains resolute in
its determination to return inflation to target and will do what is necessary to achieve that outcome.
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