The Reserve Bank has delivered another blow to millions of Aussies with a mortgage by declining to cut interest rates during a cost-of-living crisis – and blamed high immigration for stubborn inflation.
The cash rate was left on hold at a 12-year high of 4.35 per cent even though the US, UK, Canada, European Union and New Zealand have this year already cut interest rates.
Reserve Bank Governor Michele Bullock delivered a blunt message on Tuesday to borrowers hoping for some relief after the most aggressive hikes in a generation.
‘While headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high,’ she said.
She also blamed international students and Australia’s high immigration levels for the cost-of-living crisis, noting they had underpinned the growth in demand for goods and services.
‘Earlier declines in real disposable incomes and the ongoing effect of restrictive financial conditions continue to weigh on consumption, particularly discretionary consumption,’ Ms Bullock said.
‘However, growth in aggregate consumer demand, which includes spending by temporary residents such as students and tourists, remained more resilient.’
Deloitte Access Economics partner Stephen Smith said higher immigration was keeping inflation higher for longer.
The Reserve Bank has delivered another blow to millions of Aussies with a mortgage by declining to cut interest rates (pictured is Brisbane’s Queen Street Mall)
‘High government spending and migration are injecting demand into the economy, meaning the RBA’s hands are tied – the labour market is still too robust to permit them to follow the US Federal Reserve and deliver a rate cut at this time,’ he said.
Underlying inflation, stripping out volatile price movements, was 3.9 per cent in the year to June, putting it way above the RBA’s 2 to 3 per cent target.
‘Inflation is still above our target and it’s proving to be sticky,’ Ms Bullock told reporters on Tuesday.
‘Progress in getting underlying inflation down has slowed and it’s likely to have remained slow in the September quarter.
‘It’s not really forecast to come back sustainably into the band until 2026.’
Headline inflation was slightly lower at 3.8 per cent because of moderating petrol prices but this isn’t the RBA’s preferred inflation measure because it’s more erratic.
Ms Bullock said while the federal government’s temporary $300 energy rebates would reduce headline inflation – also known as the consumer price index – they would do little to reduce underlying inflation in the next set of monthly inflation data for August, due out on Wednesday.
‘That’s going to lower energy prices, fuel prices have also come down in recent months so, it could well be on current forecasts that the headline inflation rate in fact comes in – 12 month ended – below 3 per cent,’ she said.
‘That is important because it’s reflecting cost-of-living relief so it is reflected in the prices that people are seeing.
‘But it’s not really reflective of the underlying inflation pulse which is more, what are we observing happening with services really, which is the crux of the matter.’
The RBA board emphasised its preferred underlying inflation measure, known as the trimmed mean, would be unlikely to fall under 3 per cent until the end of 2025, referencing last month’s statement on monetary policy.
‘The most recent projections in the August SMP show that it will be some time yet before inflation is sustainably in the target range,’ it said.
Reserve Bank Governor Michele Bullock delivered a blunt message on Tuesday to borrowers hoping for some relief soon
Ms Bullock also hinted another rate rise was still possible, even though the U.S. Federal Reserve last week delivered a super-sized 50 basis point rate cut.
‘Data since then have reinforced the need to remain vigilant to upside risks to inflation and the board is not ruling anything in or out,’ her board said.
‘Policy will need to be sufficiently restrictive until the board is confident that inflation is moving sustainably towards the target range.’
But she clarified that a rate rise wasn’t considered at the RBA’s latest two-day meeting in Sydney because there wasn’t new data to change the board’s mind.
‘We didn’t explicitly consider an interest rate rise at this meeting,’ she said.
In a sign of tension with the RBA, Treasurer Jim Chalmers scheduled a 3pm AEST media conference on Tuesday afternoon, ahead of Ms Bullock’s 3.30pm press conference.
He reiterated that immigration levels had fallen, even though the annual growth of 432,150 in the year to July was barely lower than March’s near record-high pace of 509,800.
‘We’ve got a sensible, methodical, considered way to manage net overseas migration down. It has started coming down,’ he told reporters in Toowoomba.
‘The data doesn’t yet capture that.’
Australia’s economic growth pace of 1 per cent is the slowest since 1991, the year of a recession, outside of a pandemic.
The Reserve Bank’s 13 interest rate rises in 2022 and 2023 were the most aggressive since the late 1980s.
She also blamed international students and Australia’s high immigration levels for the cost-of-living crisis noting they had underpinned ‘growth in aggregate consumer demand’
Dr Chalmers had vowed to enhance the RBA’s independence and remove the Treasurer’s veto power over monetary policy, with the Greens opposed to that reform proposal before the Parliament.
But he blamed the Reserve Bank for weak economic activity.
‘Consumption is very weak in our economy and discretionary spending has gone backwards quite substantially,’ Dr Chalmers said.
‘That is an indication that the combination of global uncertainty, persistent inflation and higher interest rates are slowing our economy quite considerably.’
Australia’s key inflation measures are higher than other first-world nations that have this year cut rates, with the 3.8 per cent consumer price index much higher than the American equivalent of 2.5 per cent.
But the RBA cash rate – at 4.35 per cent since November 2023 – didn’t go as high as the equivalent policy rates in the US, UK, Canada or New Zealand, which had all started with a ‘five’.
‘Economic circumstances here are a little different than they are overseas,’ Ms Bullock said.
The RBA board emphasised its preferred underlying inflation measure, known as the trimmed mean, would be unlikely to fall under 3 per cent until the end of 2025 (pictured is Michele Bullock on Tuesday afternoon)
‘New Zealand, Canada, for example have seen quite sharp rises in their unemployment rates; some of those countries have seen inflation come down further than we are at the moment so their disinflation and process is more advanced than ours is.’
The futures market had regarded an Australian rate cut as only a 10 per cent chance heading into Tuesday’s decision, with Ms Bullock in recent weeks ruling out relief in 2024.
The Australian Bureau of Statistics is releasing monthly inflation data for August on Wednesday.
‘What we’ve seen in the most recent inflation figures is that services has been the thing that’s been holding inflation up,’ Ms Bullock said.
‘Building cost inflation has been relatively high as well.’
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