Statement on Monetary Policy – August 2024

Inflation is still too high because demand is still too strong.

Growth is recovering slowly in many advanced economies, but progress in lowering inflation has been mixed.

In Australia, there is still more demand for goods and services than the economy can sustainably supply, causing inflation to be persistent. Conditions in the labour market are easing but still tight, and wages growth remains high even though productivity growth is weak.

Economic growth is expected to pick up next year.

The outlook for growth has been upgraded due to stronger-than-forecast public demand as well as a pick-up in household spending as real incomes rise. These factors are expected to be partly offset by stronger growth in imports, and weaker growth in housing construction.

The labour market is expected to continue easing gradually but to remain tight.

The participation rate remains strong and average hours worked have proven resilient. Job vacancies have come down, but they are still higher than before the pandemic. The unemployment rate is expected to keep slowly rising until early 2025 but the expected recovery in GDP growth should continue to support demand for labour.

Inflation is expected to take longer to return to target.

Demand in the economy is likely to be high for some time due to underlying inflationary pressures. Headline inflation is expected to come down temporarily due to cost-of-living support, before rising again when that support ends. Headline and underlying inflation are expected to track towards the midpoint of the target in 2026.

Uncertainties remain. On the one hand, there could be further delays to returning inflation to target if the labour market is tighter than we think or if the pick-up in GDP growth is stronger than we expect. This could cause inflation expectations to increase, leading to further interest rate rises and higher unemployment to bring inflation back to the target.

On the other hand, the labour market could soften faster or further than forecast if demand turns out to be weaker. This would lead inflation to be lower than we expect.

At its August meeting, the Board decided to hold the cash rate.

Returning inflation to target within a reasonable timeframe remains the Board’s highest priority. The Board’s decision balances the risk that inflation could take longer to return to target with the risk that the labour market could ease significantly more than forecast. The cash rate will need to remain high enough to ensure inflation returns sustainably to the target range.