Statement by Philip Lowe, Governor: Monetary Policy Decision – August 2023

Interest rates have been increased by 4 percentage points since May last year. The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so. In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.

Inflation in Australia is declining but is still too high at 6 per cent. Goods price inflation has eased, but the prices of many services are rising briskly. Rent inflation is also elevated. The central forecast is for CPI inflation to continue to decline, to be around 3¼ per cent by the end of 2024 and to be back within the 2–3 per cent target range in late 2025.

The Australian economy is experiencing a period of below-trend growth and this is expected to continue for a while. Household consumption growth is weak, as is dwelling investment. The central forecast is for GDP growth of around 1¾ per cent over 2024 and a little above 2 per cent over the following year.

Conditions in the labour market remain very tight, although they have eased a little. Job vacancies and advertisements are still at very high levels, although firms report that labour shortages have lessened. With the economy and employment forecast to grow below trend, the unemployment rate is expected to rise gradually from its current rate of 3½ per cent to around 4½ per cent late next year. Wages growth has picked up in response to the tight labour market and high inflation. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up.

Returning inflation to target within a reasonable timeframe remains the Board’s 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 people’s expectations, it would be very 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.

The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow. There are though significant uncertainties. Services price inflation has been surprisingly persistent overseas and the same could occur in Australia. There are also uncertainties regarding the lags in the operation of monetary policy and how firms’ pricing decisions and wages will respond to the slowing in the economy at a time when the labour market remains tight. The outlook for household consumption is also an ongoing source of uncertainty. Many households are experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income. In aggregate, consumption growth has slowed substantially due to the combination of cost-of-living pressures and higher interest rates.

Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that 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 household spending, 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.

Source: Reserve Bank of Australia, August 1, 2023