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Further tightening may be required, the bank says, but higher interest rates are working.
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RBA weighs uncertainty in rate decision
01 August 2023
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The RBA has left interest rates on hold at 4.1 per cent to assess the impact of its string of rises since May last year but said uncertainty remained and “further tightening of monetary policy may be required”.
“The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so,” Governor Philip Lowe said announcing the decision.
“In light of this and the uncertainty surrounding the economic outlook, the board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.”
The RBA said it expected inflation to keep falling to around 3.25 per cent by the end of next year and back within its 2–3 per cent target range in late 2025.
It forecast GDP growth of around 1.75 per cent over 2024 and a little above 2 per cent over the following year, with unemployment increasing to around 4.5 per cent late next year.
However, Mr Lowe raised concerns about services inflation and how long it would take for previous rate raises to impact the economy.
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“The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow,” he said.
“There are though significant uncertainties. Services price inflation has been surprisingly persistent overseas and the same could occur in Australia. There are also uncertainties regarding the lags in the operation of monetary policy and how firms’ pricing decisions and wages will respond to the slowing in the economy at a time when the labour market remains tight.
“The outlook for household consumption is also an ongoing source of uncertainty. Many households are experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income.
“In aggregate, consumption growth has slowed substantially due to the combination of cost-of-living pressures and higher interest rates.”
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks.”
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