In newly released economic forecasts, the Reserve Bank of Australia (RBA) projected that trimmed mean inflation would decrease to 2.7% by mid-2025 and hold steady through mid-2027. This projection factored in market expectations of three interest rate reductions this year. The decision to cut rates, even with core CPI projected to remain above the 2-3% target midpoint, prompted questions from economists.
RBA Deputy Governor Andrew Hauser provided further context in a recent interview. He revealed that the board considered an alternative scenario where interest rates remained unchanged. This scenario indicated that inflation would not only fall to 2.7% but would further decline below the target midpoint.
“One crucial piece of information the board reviewed was a forecast modeling the outcome of maintaining constant interest rates,” Hauser explained. “This model showed inflation dipping below the midpoint – not significantly, but enough to heavily influence the board’s decision.” This insight underscores the RBA’s proactive approach to managing inflation expectations and ensuring price stability.
This week, the RBA reduced the cash rate by 25 basis points to 4.1%, aligning with the global trend of easing monetary policy. However, Hauser emphasized the need for caution regarding future rate adjustments, noting that core inflation, currently at 3.2%, still exceeds the RBA’s target.
alt text: Chart comparing RBA's cash rate to other central banks.
“Our objective is to rigorously cool down prices,” stated Hauser, the first foreign official to hold a senior position at the RBA. “Successfully controlling inflation is not guaranteed. We’ve reduced some restrictive measures, but bringing inflation sustainably back to the midpoint requires further action. We’re easing off the brake slightly, not accelerating rapidly – that’s our current strategy.”
Hauser’s comments, perceived as hawkish by financial markets, led to a rise in yields on Australian 10-year government bonds, surpassing US peers by over 1 basis point, the highest differential since December 10th. Overnight-indexed swaps continue to suggest another RBA rate move in August, although expectations for a third cut have been tempered to 70%. The RBA remains committed to its inflation target and will continue to closely monitor economic data to inform future policy decisions.
