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Australia Monetary Policy May 2024

Australia: Reserve Bank stands pat in May

At its meeting on 7 May, the Reserve Bank kept the cash rate target unchanged at 4.35% and the interest rate on Exchange Settlement balances at 4.25%.

The decision to maintain interest rates was primarily influenced by high inflation, which the Bank sees declining more slowly than anticipated. Key domestic factors driving this include persistent services inflation and strong domestic cost pressures from both labor and non-labor inputs, despite higher interest rates beginning to balance aggregate demand and supply.

The Reserve Bank provided no explicit forward guidance on the future trajectory of interest rates, stating that the path that will best ensure inflation returns to the target range remains uncertain. The Board emphasized its commitment to returning inflation to the 2.0%–3.0% target range but acknowledged the high level of uncertainty surrounding the economic outlook and monetary policy effects, indicating it will rely on incoming data and risk assessments. Our panelists expect the Bank to reduce rates slightly by year-end.

Commenting on the outlook, UOB’s Lee Sue Ann stated:

“A rate hike is not our base case, despite the upside in inflation. Instead, we think that the RBA would be on hold for longer. We had seen a chance of a pivot to easing in 3Q24, but the risk of that occurring could be pushed back further.”

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