RBA Keeps Rates Steady, Says All Policy Options Remain on the Table

SYDNEY—The Reserve Bank of Australia said Tuesday that it still can’t rule out the possibility that interest rates will need to be raised further, adding that inflation remains too high and is expected to remain elevated for some time yet.

The RBA left its official cash rate on hold at 4.35% at its policy meeting. The decision was widely expected by economists.

“While recent data indicate that inflation is easing, it remains high. The board expects that it will be some time yet before inflation is sustainably in the target range,” the RBA’s policy setting board said Tuesday.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out,” it added.

The RBA’s guidance was little changed from its policy announcement in February, and will buy it time before the release of first-quarter inflation and economic growth data in coming weeks.

The threat of further interest rate increases stems from the fact that while inflation has fallen to its lowest level in two years, it remains significantly above the RBA’s 2%-3% target band at a time when there is still pressure building under wages, while the center-right Labor government will hand out income tax cuts in the middle of the year.

“The board needs to be confident that inflation is moving sustainably towards the target range. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case,” the RBA said.

Inflation continues to be fueled by things like soaring rents and rising electricity and insurance costs, areas of the economy the RBA’s policy instrument of interest rates can only affect at the margin.

The RBA will continue to lag behind many other major central banks that are already pointing toward the probability that interest rates could fall soon.

The lag in Australia is partly due to the fact that interest rates weren’t raised by the same amount seen in other countries, as the RBA wanted to protect employment.

The RBA isn’t forecasting inflation to return to its target band until early 2026, which means inflation will have been outside of the band for close to four years.

Still, the likelihood that the RBA actually does deliver a further increase in interest rates appears low given that the economy’s growth rate is at its slowest in 30 years, while unemployment has risen quickly over recent months.

“The RBA stuck to its hawkish guns at today’s meeting but we think it will pivot towards policy easing by August this year…but the board clearly isn’t letting down their guard,” said Marcel Thieliant , head of Asia-Pacific operations at Capital Economics.

Australia is in the midst of a ‘baby recession’ with preliminary estimates showing the number of births in 2023 fell by more than four percent to the lowest level since 2006, according to KPMG. The consultancy firm says this reflects the impact of cost-of-living pressures on the feasibility of younger Australians starting a family.

KPMG estimates that 289,100 babies were born in 2023. This compares to 300,684 babies in 2022 and 309,996 in 2021, according to the Australian Bureau of Statistics (ABS). KPMG urban economist Terry Rawnsley said weak economic growth often leads to a reduced number of births. In 2023, ABS data shows gross domestic product (GDP) fell to 1.5 percent. Despite the population growing by 2.5 percent in 2023, GDP on a per capita basis went into negative territory, down one percent over the 12 months.

“Birth rates provide insight into long-term population growth as well as the current confidence of Australian families,” said Mr Rawnsley. “We haven’t seen such a sharp drop in births in Australia since the period of economic stagflation in the 1970s, which coincided with the initial widespread adoption of the contraceptive pill.”

Mr Rawnsley said many Australian couples delayed starting a family while the pandemic played out in 2020. The number of births fell from 305,832 in 2019 to 294,369 in 2020. Then in 2021, strong employment and vast amounts of stimulus money, along with high household savings due to lockdowns, gave couples better financial means to have a baby. This led to a rebound in births.

However, the re-opening of the global economy in 2022 led to soaring inflation. By the start of 2023, the Australian consumer price index (CPI) had risen to its highest level since 1990 at 7.8 percent per annum. By that stage, the Reserve Bank had already commenced an aggressive rate-hiking strategy to fight inflation and had raised the cash rate every month between May and December 2022.

Five more rate hikes during 2023 put further pressure on couples with mortgages and put the brakes on family formation. “This combination of the pandemic and rapid economic changes explains the spike and subsequent sharp decline in birth rates we have observed over the past four years,” Mr Rawnsley said.

The impact of high costs of living on couples’ decision to have a baby is highlighted in births data for the capital cities. KPMG estimates there were 60,860 births in Sydney in 2023, down 8.6 percent from 2019. There were 56,270 births in Melbourne, down 7.3 percent. In Perth, there were 25,020 births, down 6 percent, while in Brisbane there were 30,250 births, down 4.3 percent. Canberra was the only capital city where there was no fall in the number of births in 2023 compared to 2019.

“CPI growth in Canberra has been slightly subdued compared to that in other major cities, and the economic outlook has remained strong,” Mr Rawnsley said. “This means families have not been hurting as much as those in other capital cities, and in turn, we’ve seen a stabilisation of births in the ACT.”

RBA Keeps Rates Steady, Says All Policy Options Remain on the Table

The RBA left its official cash rate on hold, which was widely expected by economists

Continued stagflation and cost of living pressures are causing couples to think twice about starting a family, new data has revealed, with long term impacts expected