Interest rates on hold at 4.35 per cent but RBA offers bleak six-month outlook on cuts

The Reserve Bank has warned rate cuts are off the agenda for the next six months, dashing the hopes of Australians already struggling with rising mortgage costs, and increasing pressure on the Federal government to ease cost-of-living without adding to “persistent” inflation.

The RBA “seriously” considered hiking rates despite weaker-than-expected quarterly inflation data, but on Tuesday ultimately opted to keep it steady at 4.35 per cent for the sixth meeting in a row.

Acknowledging the volatility in global markets, Governor Michele Bullock warned that because inflation was not falling as fast as previously expected, and with the economy still overheated, rates would be “higher for longer”.

She also took the prospect of a “near-term” rate cut off the table, meaning there will be no relief to mortgage holders for at least six months.

“The judgement of the board was that keeping the interest rate where it is, and making sure that people understand that a rate cut is not on the agenda in the near term, given what we know that continued pressure will help to keep demand coming back into line with supply,” she said.

In the updated forecasts released on Tuesday, trimmed mean inflation – the figure the RBA uses to get the best picture of prices – is not forecast to hit 3.1 per cent until June 2025, before dipping to 2.9 per cent by December 2025. The bank doesn’t expect underlying inflation to reach 2.6 per cent until the end of 2026.

Ms Bullock acknowledged people were doing it tough - and that she had received some “quite distressing” letters from Australians - but she warned the bank would be ruthless in achieving its goal of getting “persistent” inflation back between two and three per cent, which would help the most people in the long term.

“We’ve seen from overseas experience how bumpy inflation can be on the way down and across the economy. We need to see demand and supply coming back into better balance,” she said.

“I understand this is not what people want to hear ... Many people are doing it tough and we’re very conscious of that. But really the best thing we can do ... is to bring inflation back down to target, because we can’t let inflation get away - it hurts everyone.

“This is why we need to stay the course.”

Excess demand in the economy is partly to blame for persistent inflation, with Ms Bullock acknowledging the concerted effort being made to bring that back in line with supply.

“While growth of demand has been slow, there’s actually no guarantee that supply and demand will return to balance quickly enough. What we really need to see is the underlying pulse of inflation - trim mean - to come down further, because the longer that remains elevated,the more it hurts everyone,” she said.

Headline inflation meanwhile, is forecast to come down in the near term as well, which the bank attributed to the Federal government’s cost-of-living relief, but predicts that will rise again when that temporary support ends.

Treasurer Jim Chalmers said Tuesday’s news was “welcome”, as it recognised the pressure Australians are under, and the “progress” the Labor government had made on tackling inflation.

“Australians are doing it tough already, and the last thing they needed today was more cost-of-living pressure,” Dr Chalmers said.

“That’s why the Albanese Labor government is rolling out substantial and responsible cost-of-living relief that helps in the fight against inflation ... The Reserve Bank governor has said (that) is helping in the fight against inflation.

“Our economic plan is all about fighting inflation and easing cost-of-living pressures without smashing the economy.”

Although a rate cut has been ruled out in the near-term, the prospect of a cut before the election - due by May - remains in play.

Dr Chalmers said he wouldn’t try and predict what the RBA might do down the line.

While the bank had considered a rate hike, Ms Bullock said the likelihood of one hadn’t increased since the board’s last meeting.

“I would say that the board, though, are remaining very vigilant to the risks that it will continue to shift, that our getting back to target will continue to shift out,” she said.

“Now they think it’s where we are at the moment, in terms of our central forecast we’re fine, but if it looks like that’s shifting out again, then I think … the likelihood or the probabilities of an interest rate rise do increase.”

Shadow treasurer Angus Taylor used the RBA’s decision to accuse the Government of taking “too long to break the back of inflation”, and being “complacent”.

“It is clear that inflation is running the economy, not the government,” Mr Taylor said.

He said the alternative way forward was “getting back to basics” and ensuring the economy’s growth outstripped spending.

Dr Chalmers said the government had to “balance” the priorities of controlling inflation and stimulating growth, but the primary focus was on fighting inflation.

“But we can’t ignore the fact that growth in our economy is soft, job ads are down, household savings are down, discretionary consumption was almost non-existent at the start of the year,” he said.

“So we have to strike a series of balances.”

He said the global economic uncertainty currently being felt could not be ignored either.

Tuesday’s decision came as Australia’s share market bounced back slightly after a bleak day for investors on Monday, where more than $100 billion was wiped off the ASX in the biggest one-day drop in four years.

The losses were triggered by fears out of the United States after weaker-than-expected jobs data, which prompted a sell-off on Wall Street that reverberated across global markets. It also coincided with Japan’s decision to lift interest rates, which cooled the Asian market.

Ms Bullock said the market volatility hadn’t played a role in the board’s ultimate decision, but was “of interest” and was being monitored.

“I think things have settled down a bit today, but it was one employment number in the United States. I think we need to have a little bit of caution and a little bit of calm,” she said.

She said the bank would take a “wait and see” approach as to whether the volatility persisted.

Dr Chalmers said the volatility had been “really substantial”, and while there were early signs that had been unwound in Japan on Tuesday, it was a “reminder of just how uncertain the global economic environment is”.

“We are confident about the Australian economy ... But this is a really important warning against complacency,” he said.