In December, the Reserve Bank of Australia (RBA) opted to keep interest rates unchanged at 4.35 percent, citing ‘encouraging signs’ that previous rate hikes were effectively addressing inflationary pressures.

A fortnight ago, during its final meeting of the year, the Reserve Bank board decided to keep official interest rates on hold at 4.35 percent. Despite concerns about the possibility of inflation persisting above the 2 to 3 percent target for an extended period, the board, noting encouraging signs of progress in tackling inflation, chose to maintain the status quo. The pre-Christmas tone was cautious, with board members agreeing on the value of waiting for additional data to assess evolving risks. However, they emphasized the need for the observed progress towards the Board’s objectives to continue.

Since the December 5 meeting, economic indicators revealed a flatlining in economic growth in the third quarter, accompanied by negative per capita GDP. The November unemployment rate also edged higher to 3.9 percent, signaling a moderation in the still-tight job market. The midyear budget update released last week predicted a further rise in the jobless rate to 4.5 percent next year.

Economists are now turning their attention to the next quarterly Consumer Price Index (CPI) report scheduled for January 31, hoping for confirmation that inflation is on a continued trajectory toward the RBA target. Despite these considerations, RBA board members express lingering concerns that inflation might only return to the upper limit of the 2 to 3 percent band by the end of 2025, falling short of the central bank’s mandate to achieve the midpoint over time. The case for raising the cash rate in the December meeting was rooted in the risks associated with the potential prolongation of high inflation and the observation that underlying inflation in Australia, excluding volatile items like fuel and food, exceeded levels in several other countries.

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