Statement on Monetary Policy – November 2024Overview

Key messages

Underlying inflation remains too high.

Headline inflation has fallen sharply in recent months as expected, due to declines in fuel and electricity prices. Headline inflation was 2.8 per cent over the year to the September quarter, down from 3.8 per cent over the year to the June quarter. This was as expected due to declines in fuel and electricity prices in the September quarter. But part of this decline reflects temporary cost-of-living relief. Underlying inflation, which is more indicative of inflation momentum, remains too high. Trimmed mean inflation was 3.5 per cent over the year to the September quarter and in quarterly terms the pace of decline has been gradual since mid-2023.

Our assessment is that demand in the economy still exceeds supply and that the labour market remains tight. Higher interest rates have been working to bring demand and supply closer towards balance, with weak growth in private domestic demand in recent quarters partly offset by strong growth in public demand. Labour market conditions in Australia have eased but are tighter than in peer economies. Wages growth is moderating; however, labour cost growth is still elevated alongside weak productivity growth.

The cash rate remains unchanged to support inflation returning to target.

Output growth is expected to recover and easing in the labour market is expected to be gradual. Household consumption is expected to pick up in the second half of 2024 as incomes rise. Over the coming year, output growth is expected to increase to around its potential growth rate. The unemployment rate is forecast to increase gradually before stabilising around full employment, and wages growth is expected to slow as labour market conditions ease.

Inflation is expected to return sustainably to the midpoint of the target in late 2026. Inflationary pressures are expected to moderate slowly, reflecting a gradual adjustment in the balance between the demand and supply of goods and services and the degree of tightness in the labour market. Trimmed mean inflation is expected to reach 2.5 per cent by late 2026. Headline inflation is expected to rebound to be above the 2–3 per cent target range in the second half of 2025 as the energy rebates unwind (as legislated) before returning sustainably to target in 2026.

At its November 2024 meeting, the Reserve Bank Board decided to leave the cash rate target unchanged. Sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority. The forecasts suggest that it will be some time yet before this is the case, which reinforces the need to remain vigilant to upside risks to inflation.

What’s been going on in the economy?

In most advanced economies, continuing disinflation and softer labour market outcomes has resulted in central banks cutting their policy rates of late.

Underlying inflation has eased further across advanced economies, as expected, and more so than in Australia. Most advanced economy central banks have now eased their policy settings, reflecting greater confidence that inflation will settle at their targets. Labour market conditions have eased and unemployment rates have increased. In some economies, labour markets are assessed to be in balance; in others, there is spare capacity. Most advanced economy central banks still consider their policy rates to be restrictive.

Economic growth continues to recover in many of Australia’s major trading partners. US growth has remained robust; in other advanced economies, growth has picked up a little more slowly than expected. Growth in China remains subdued. Chinese authorities have announced a sizable stimulus package, which is expected to support economic growth over the coming year.

Financial conditions in Australia are weighing on private domestic demand but are judged to be less restrictive than in most peer economies.

The current setting of the cash rate is assessed to be restrictive but less so than settings of policy rates in most peer economies. The market pricing underpinning the economic forecasts implied that the cash rate will stay at its current level until around mid-2025, broadly the same as assumed in the August Statement. Interest rates on deposits and loans remain elevated but housing credit growth has continued to pick up and business credit growth remains strong. Equity risk premia have narrowed further and wholesale market funding conditions remain favourable for issuers.

Restrictive financial conditions have weighed on private domestic demand, while public demand has contributed to growth in economic activity and demand for labour. GDP growth remained subdued in the June quarter and household consumption growth was weaker than expected. There is tentative evidence of an increase in household spending in the September quarter but by less than had been anticipated at the time of the August forecasts.

Productivity growth remains weak and the economy-wide level is currently around 2016 levels. Subdued domestic demand growth has closed much of the gap between demand and supply but weak productivity growth weighs on the economy’s potential supply. Overall, our assessment is that demand for goods and services still exceeds the supply capacity of the Australian economy.

Conditions in the labour market remain tight relative to the assessment of full employment. Employment growth has been strong in recent months. The unemployment rate edged higher in the September quarter to 4.1 per cent, as growth in labour force participation outpaced employment growth. Demand for labour, particularly in the non-market sector, remains strong and vacancies are elevated. Labour cost growth has eased but remains higher than is consistent with inflation being sustainably at the midpoint of the target.

How do we see the economy developing?

The global outlook is for moderate economic growth and further easing of inflation.

Overall GDP growth for Australia’s major trading partners is expected to be moderate. The outlook for economic growth of our major trading partners has been revised a little higher for 2025 following the announcement of the stimulus package in China. This package is expected to support growth in China and removes some of the downside risk to economic activity that had been building there. In advanced economies, labour markets are easing and inflation is expected to return to central bank targets as services inflation, rent inflation and wages growth moderate.

Growth in Australia is expected to slowly return to around its potential rate of growth.

The outlook for growth in 2025 and 2026 has been revised down slightly. Household consumption is expected to pick up alongside rising real household incomes and wealth, albeit a little later than anticipated at the time of the August forecasts. The outlook for services exports is materially weaker, reflecting tighter international student visa policies, but does not materially affect the inflation outlook because lower net overseas migration will also reduce the economy’s supply capacity.

The labour market is expected to continue to ease gradually to be around full employment by late 2025. Wages growth and labour costs are expected to continue to moderate to levels consistent with inflation at target, although the outlook for productivity growth is uncertain.

Inflation is expected to return sustainably to the midpoint of the target range by the end of 2026.

The outlook for underlying inflation is little changed since the August Statement. Underlying inflation is expected to decline gradually as the gap between demand and supply in the economy closes. Services inflation is projected to decline as the labour market softens. Housing inflation is also projected to moderate as nominal income growth eases, population growth slows and earlier constraints on housing construction ease. Goods inflation is forecast to remain at its current modest pace.

Headline inflation will be below underlying inflation for a time due to temporary cost-of-living support to households. Following the end of these support measures (as legislated), headline inflation is expected to increase in the second half of 2025 to be outside the target range, before declining again to converge with measures of underlying inflation. Headline and underlying inflation are projected to reach 2.5 per cent by the end of 2026.

The outlook remains highly uncertain. A slower than expected pick-up in household consumption could result in continued subdued output growth, a sharper deterioration in the labour market and a swifter return of inflation to target. Ongoing tightness in the labour market and weak productivity growth present upside risks to inflation. More broadly, there are uncertainties regarding the lags in the effect of monetary policy and price- and wage-setting behaviour in the current economic environment. Heightened geopolitical risks and potential changes to trade and fiscal policies globally add further uncertainty to the outlook.

What did the Board decide?

At its November 2024 meeting, the Reserve Bank Board decided to leave the cash rate target unchanged. Sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment. To date, longer term inflation expectations have been consistent with the inflation target and it is important that this remain the case. While headline inflation has declined substantially and will remain lower for a time, underlying inflation is more indicative of inflation momentum, and it remains too high. The current forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint. This reinforces the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range.