Australia's high core inflation may keep the RBA's tight policy in place until 2025.

TraderKnows
TraderKnows
10-31

Core inflation pressures remain persistent, and the Reserve Bank of Australia is expected to maintain high interest rates in the short term, with a rate cut possibly delayed until 2025.

The latest data shows that Australia's core inflation rate remained high in the third quarter, indicating stubborn price pressures. Data released by the Australian Bureau of Statistics on Wednesday showed that the Consumer Price Index (CPI), excluding volatile items, rose 0.8% quarter-on-quarter in the three months to September, in line with market expectations. Year-on-year, core CPI increased by 3.5%, reflecting price support even as the government provided some subsidies. The Reserve Bank of Australia expressed concern, emphasizing that the core CPI data reflects real inflationary pressures.

The data shows that although government subsidies curbed the overall CPI increase, slowing it year-on-year to 2.8%, core inflation remained high. Reserve Bank of Australia Governor Michele Bullock noted in the annual report that the inflation rate is unlikely to return to the 2-3% target range in the next one to two years. The Reserve Bank is expected to maintain its current interest rate of 4.35% at a 12-year high, at least until early 2025. Tight monetary policy helps alleviate demand pressures in the economy but may also have a dampening effect on consumption and investment.

The cautious approach of the Reserve Bank of Australia is influenced by multiple factors, including the impact of global trade and geopolitical tensions on import prices, as well as the increase in consumer spending due to income tax cuts by the Australian government. Australia's labor market remains resilient, with a low unemployment rate supporting consumer capacity and thus price levels. This requires the Reserve Bank to be more cautious when lowering interest rates to avoid an inflation rebound.

Additionally, the government is controlling inflation by providing energy subsidies, which have alleviated some pressure on the overall CPI from energy costs. Looking ahead, as inflation gradually recedes, the Reserve Bank of Australia is expected to enter a moderate rate-cutting cycle in the first half of 2025. Analysts suggest that the divergence in monetary policy trends and yield changes between the Reserve Bank of Australia and other central banks may support the Australian dollar, particularly if inflationary pressures ease in the context of a global economic slowdown.

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Inflation

Inflation refers to the phenomenon where the purchasing power of a country's (or region's) currency decreases, leading to a general rise in the prices of goods and services. It is reflected in the fact that, over a certain period, the same amount of money can only buy fewer goods and services.

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