Core inflation is too high to cut interest rates in the near term, Australia’s central bank governor said on Thursday, almost ruling out relief for borrowers at the next policy meeting in December.
Reserve Bank of Australia Governor Michelle Bullock confirmed at an economic conference that core inflation of 3.5% in the third quarter was higher than the Reserve Bank of Australia’s target of 2% to 3%, and that policy must remain restrained until it is confident that it can reach the target range.
“As it currently stands, core inflation remains too high to consider lowering the monetary interest rate target in the near term,” Bullock said. “There is still some way to go to sustainably return inflation to our target range of 2% to 3%,” she added.
She added, “Our expectations published in the monetary policy statement in November indicate that a sustainable return to the target will occur in 2026.”
Bullock noted that demand and supply in the economy have returned to better balance with rising borrowing costs affecting consumer spending, but it will take some time.
The central bank has kept the cash rate at 4.35% for a full year, and markets had already seen only a 10% chance of a quarter-point cut at its next board meeting on December 10.
The probability of a move in February is placed at just 23%, and a drop to 4.10% is not fully priced in until May.
These projections differ markedly from most other advanced economies that have already embarked on easing cycles. Neighboring New Zealand cut its rates by 50 basis points to 4.25% this week, putting them below Australia’s rates.
Bullock said these varying speeds reflect the different priorities that central banks have placed on inflation and employment targets.
The RBA has sought to lock in most of the significant job gains made since the pandemic and has therefore not tightened policy as much as its counterparts.
“Consistent with this, inflation has been somewhat higher than target here compared to most of those economies, and the labor market is tighter,” Bullock added.
Australia’s unemployment rate has risen less than most of its peers this year and remained historically low at 4.1% in October.
Demand for workers has also been strong, especially in sectors like health care and education, Bullock added.
“In fact, labor market conditions in Australia appear to be unusually tight, compared to those in other similar economies,” Bullock said. “At present, we judge that labor market conditions remain tighter than would be consistent with low and stable inflation.”
