The Reserve Bank has handed down its latest interest rate decision following higher than expected inflation data.

The Reserve Bank of Australia has decided to keep the cash rate target on hold at 4.35 per cent following the latest Reserve Bank Board meeting.

The decision to keep rates on hold had largely been anticipated by economists with inflation still problematic but the economy weakening.

RSM Australia economist Devika Shivadekar said given the RBA’s concerns about sticky inflation, it makes sense the RBA would take a “cautious non-action stance”.

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AMP chief economist Shane Oliver said following the recent higher than expected inflation data, the RBA still lacks the confidence to start cutting rates.

Dr Oliver said the RBA will likely hold the next few meetings, wth the risks still on the upside for rates.

“weaker growth and lower inflation should allow a cut by year end,” he said.

Moody’s Analytics economist Harry Murphy Cruise said the outlook for inflation in Australian had become “a little murkier” recently.

Murphy Cruise said the government and RBA are hoping that the various rebates it’s introducing will help lower inflation by temporarily lowering the price in the CPI, and secondly by tempering inflation expectations. 

Treasury expects the rebates to shave 0.5 percentage point from the headline inflation rate in the year to 30 June, 2025,” he said.

“The big question is what it will do to underlying inflation—the Reserve Bank of Australia’s preferred measure of inflation, which strips out volatile items, often food and energy.

“These impacts are much less clear. It will all depend on how much of the energy rebates gets spent, and how much gets squirrelled away into savings.

If they’re spent, Murphy Cruise said this will add to demand at the exact same time the RBA is trying to take it out, adding to underlying inflation even if the headline figure comes down.

“What’s more, the rebate comes at the same time as a slew of similar rebates from state governments and the reworked stage-three tax cuts, which are set to hand the average worker a tax reduction of A$1,500,” he said.

“All that will ensure the RBA stays put for a little longer; its next move will be down, but we’ll have to wait a little longer.

“The board will be cautious not to pull the rate-cut trigger too early, what with large amounts about to hit bank accounts. We see rates staying where they are until December, when a 25-basis point cut will take the cash rate to 4.1 per cent.”

Article written by Amanda Brownlee. Sourced from Accountants Daily Tuesday 18 June 2024. 3:00pm []