Australia’s inflation rate fell for the first time in many months and entered the Reserve Bank of Australia’s target range for the first time since August 2021. Not for the first time, inflation eased to 2.7% from 3.5% in July, this time comfortably within the RBA’s target range of 2%-3%.
This sent a happy signal, although the RBA also signaled that an interest rate cut was still not at hand. Just a day prior to publishing its inflation report, the central bank reinforced its message of steady hawkishness, unlike the U.S. Federal Reserve, which sliced 50 basis points off its key overnight rate last month even as inflation was still slightly above its benchmark.
RBA governor Michelle Bullock said even though inflation fell within the target band, that does not necessarily mean inflation is under control. “If tomorrow we get an inflation number with a two in front of it.”. According to Bullock, that does not mean that we have inflation under control. Speaking at the press conference following the RBA decision not to increase the benchmark interest rate to 4.35%, she added the expected decline in inflation is largely due to government relief programs. She further believes that once these programs are out of the way, inflation will rise again.
Said the bank in its monetary policy statement: “The federal and state cost of living relief efforts are likely to send headline inflation even lower, but it doesn’t see inflation returning sustainably to target levels until 2026. Bullock underlined her preference for a steady downward trend in inflation that would support the stability of the target range.
Economist Sean Langcake of Oxford Economics Australia also echoed Bullock’s sentiments that government subsidies might skew the upcoming Consumer Price Index data. He said that relief programs may bring inflation within the RBA’s target for the near term but some analysts suspect that underlying inflation could prove surprisingly unaltered as subsidy effects would be offset when government payments were cut back next year.
Langcake added that the rate cuts by other central banks around the world recently have little bearing on the policy decisions of the RBA, and estimates the rates to remain unchanged till Q2 of 2025. He said that a significant improvement in core inflation was unlikely to occur in the near term and suggested the RBA would need three more inflation reports before starting an easing cycle.
