Financial stability review: Sights on economic dangers as inflation edges back on target

The economy’s biggest challenges in coming months will be laid out by the Reserve Bank as figures put inflation back in its target range.

The central bank will on Thursday release its financial stability review detailing risks to the economy in Australia and globally, and how well households and businesses will be able to handle the possible threats.

The reviews are released twice a year, with the previous report in March warning that low-income families, renters and people with large debts faced the biggest risks.

It comes as an OECD economic outlook said Australia’s economy was on track to grow by 1.1 per cent in 2024 and 1.8 per cent in 2025, below the average of G20 nations.

The body forecast global growth is expected to stabilise at 3.2 per cent in the same period.

“Significant” risks remain despite the global economy’s resilience and inflation moderating, said the OECD, which also warned geopolitical tensions could damage investment.

High interest rates and persistent inflation had weighed heavily on the global economy, Treasurer Jim Chalmers said.

“We’re not immune from these pressures with soft growth in our economy, but with historically low unemployment, underlying and headline inflation both moderating and record jobs growth, we’re in a better position than most to deal with global economic volatility,” he said.

“Our economic plan is all about fighting inflation and the cost of living, investing in the future and getting the budget in better nick without smashing the economy.”

The report’s release comes after figures revealed inflation fell to 2.7 per cent in the year to August, down from 3.5 per cent in July.

It’s the first time since October 2021 that inflation was back in the Reserve Bank’s target band of between two and three per cent.

But the bank’s governor Michele Bullock said data about underlying inflation, which removes volatile price movements such as those for fuel and electricity, would be taken into account more before any decision on whether to cut interest rates.

Underlying inflation decreased in August, from 3.8 per cent to 3.4 per cent.

The Reserve Bank decided to keep interest rates on hold at 4.35 per cent at its most recent meeting, on Tuesday.

The central bank has not raised interest rates since November 2023, though economists say a cut before the end of 2024 is unlikely.

The inflation data was expected, but it would still be several months before mortgage holders might get a reprieve, CreditorWatch chief economist Anneke Thompson said.

“This result provides no surprises, on the upside or downside, to the RBA, and is unlikely to shift its thinking around the timing of the first cut to the cash rate,” she said.

“Given household consumption is likely to stay very subdued for the remainder of the year, it is likely that trimmed mean monthly inflation will continue its slow trend down over the next few months.”