The Reserve Bank of Australia maintains its interest rate at 4.35% for the third consecutive meeting

He The Reserve Bank of Australia (RBA) has decided to keep its main interest rate unchanged at 4.35% at the March meeting, as expected.

This is the third consecutive meeting without changes in rates since the RBA decided in November to raise them 25 basis points to the current level.

RBA statement

At its meeting today, the Board decided to leave the target cash rate unchanged at 4.35% and the interest rate paid on Foreign Exchange Settlement balances unchanged at 4.25%.

Inflation continues to moderate but remains high

Recent data suggests inflation continues to moderate, in line with the RBA's latest forecasts. The monthly headline CPI indicator remained stable at 3.4% over the year through January, with momentum attenuating in recent months due to moderating goods inflation. Services inflation remains high and is easing at a more gradual pace. The data are consistent with continued excess demand in the economy and strong domestic cost pressures for both labor and non-labor inputs.

Higher interest rates are working to establish a more sustainable balance between aggregate demand and supply in the economy. Consequently, conditions in the labor market continue to gradually improve, although they remain tighter than is consistent with sustained full employment and on-target inflation. Wage growth picked up a little more in the quarter ending in December, but appears to have peaked and there are signs it will moderate over the next year. However, this level of wage growth remains consistent with the inflation target only on the assumption that productivity growth increases to around its long-term average. Inflation continues to weigh on people's real incomes and household consumption growth is weak, as is housing investment.

Outlook remains very uncertain

While there are encouraging signs that inflation is moderating, the economic outlook remains uncertain. National accounts data for the quarter ending in December confirmed that growth has slowed. Household consumption growth remains particularly weak against a backdrop of high inflation and rising interest rates. After recent declines, real incomes have stabilized and are expected to grow from now on, which is expected to support consumption growth later in the year.

Meanwhile, unit labor cost growth remains very high. It has begun to moderate slightly as measured productivity growth has recovered over the past two quarters, but it is uncertain whether this trend will continue.

The Central forecasts suggest that inflation will return to the target range of between 2 and 3% in 2025 and to the midpoint in 2026. Service price inflation is expected to gradually decline as demand moderates and growth in labor and non-labor costs moderates. Employment is expected to continue to grow moderately and the unemployment rate and the broader rate of underutilization are expected to rise somewhat further.

While there have been favorable signs about goods price inflation overseas, service price inflation has remained persistent and the same could be true in Australia. A high level of uncertainty also remains around the prospects for the Chinese economy and the implications of the conflicts in Ukraine and the Middle East. Domestically, there are uncertainties regarding lags in the effect of monetary policy and how companies' pricing and wage-setting decisions will respond to slower growth in the economy at a time of excess demand and while the labor market remains tight. The outlook for household consumption also remains uncertain.

The priority is to return inflation to the target

Re-achieving the inflation target within a reasonable time frame remains the Board's top priority. This is consistent with the RBA's mandate of price stability and full employment. The Board must be confident that inflation is moving sustainably towards the target range. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.

While recent data indicates that inflation is declining, it remains high. The Board expects that it will take some time before inflation is sustainably within the target range.. The path of interest rates that best ensures that inflation returns to its target in a reasonable period of time remains uncertain and the Board is not ruling anything in or out. The Board will be based on the data and the evolution of the risk assessment. The Board will continue to pay close attention to developments in the global economy, domestic demand trends, and inflation and labor market prospects. The Board remains firm in its determination to return inflation to its target.