RBA Holds Rates Amidst Economic Uncertainty

The Reserve Bank of Australia held the cash rate steady at 3.60 per cent on Tuesday, adopting a cautious stance as mixed economic signals create uncertainty about the appropriate policy response.

Balancing Inflation and Employment

The decision to hold reflects the central bank’s careful approach when facing conflicting economic indicators. On one hand, the labour market is showing signs of softening. Employment growth has slowed dramatically since April, with 5,400 jobs lost in August and the economy adding just 24,000 jobs between May and August, a sharp drop from the 80,000 added in the first four months of the year. The participation rate also declined slightly from 67 per cent to 66.8 per cent.

On the other hand, headline inflation rose to 3.0 per cent, its highest level in a year. While this increase is largely attributed to expiring government electricity rebates, the RBA appears to be prioritising inflation vigilance. Despite Governor Bullock’s focus on underlying measures, which showed trimmed mean inflation falling to a more comfortable 2.6 per cent, the central bank seems unwilling to ease policy while the headline figure sits at the top of its target band.

The RBA’s assessment is that while the labour market has cooled, the current unemployment level of 4.2 per cent remains consistent with full employment. This provides the bank with the scope to prioritise inflation control over immediate employment support.

Future Outlook

Having held rates on Tuesday, the RBA has likely increased the probability of a cut at its November meeting should labour market conditions continue to deteriorate. Financial markets are already pricing in significant easing by year-end, and this week’s pause positions the central bank to act more decisively if upcoming employment data weakens further.

The November meeting will be critical, as it will benefit from additional labour market data and updated quarterly inflation figures. This new information could provide the RBA with greater confidence to ease policy. If employment growth remains weak and underlying inflation stays contained, a more substantial policy response could be warranted.

Housing Market Remains Resilient

Despite Tuesday’s decision and the broader economic uncertainty, Australia’s housing market continues to demonstrate remarkable momentum. Driven by significant supply constraints and demographic pressures, current market dynamics appear sufficiently robust to sustain growth even without additional monetary stimulus. Established trends in the property market are likely to continue.