RBA Leaves Cash Rate Unchanged Amid Inflation and Growth Concerns

Assem Mansour

1 week ago

The Reserve Bank of Australia (RBA) has decided to keep the cash rate target steady at 4.35% and the interest rate on Exchange Settlement balances unchanged at 4.25% following its most recent board meeting. This decision reflects the Board’s continued effort to balance inflationary pressures and sluggish economic growth in an uncertain global and domestic environment.

Inflation Remains the Central Challenge

Despite headline inflation dropping significantly since its peak in 2022, underlying inflation remains elevated at approximately 3.5%. While this is an improvement, it still sits above the RBA’s inflation target midpoint of 2.5%. According to the RBA’s November Statement on Monetary Policy (SMP), inflation is not expected to sustainably return to the target range until 2026. This slow progress underscores the difficulty of curbing inflation while maintaining economic stability.

The RBA expressed some confidence that inflationary pressures are declining as projected. However, risks persist, including the possibility of global shocks or unexpected domestic challenges that could derail progress.

Weak Economic Growth and Mixed Data

Economic activity has been weaker than anticipated. The Australian economy grew by only 0.8% in the year to September, marking the slowest pace of growth since the early 1990s (excluding the pandemic). Household consumption remains subdued, weighed down by declining real disposable incomes and restrictive financial conditions. Discretionary spending, in particular, has been hit hard, highlighting the strain on household budgets.

Labour market conditions, while still tight, have shown signs of gradual easing. The unemployment rate rose to 4.1% in October, up from 3.5% in late 2022. Nevertheless, employment growth remains robust, and the participation rate is near record highs. However, weaker productivity growth and moderated wage pressures have added to the complexity of the economic picture.

Risks to Domestic and Global Outlook

The Board highlighted several risks that could affect Australia’s economic trajectory:

1. Domestic Risks: A slower-than-expected recovery in household consumption and subdued output growth could lead to a sharper deterioration in the labour market. Additionally, uncertainties remain regarding the lagged effects of monetary policy and the responses of businesses and workers to weak productivity and excess demand.
2. Global Risks: Geopolitical tensions and varying approaches to monetary policy by central banks worldwide add another layer of uncertainty. While some central banks have eased monetary restrictions, they remain cautious about inflationary pressures and potential economic slowdowns.

RBA’s Focus: Inflation Target Remains Paramount

The Board reiterated that returning inflation to the target range sustainably remains its highest priority. The RBA emphasized the importance of maintaining long-term inflation expectations consistent with its 2–3% target range. While headline inflation has declined substantially, underlying inflation still indicates persistent inflationary momentum.

The RBA will continue to monitor economic data and evolving risks closely. It remains committed to adjusting monetary policy as needed to achieve its dual mandate of price stability and full employment. Key areas of focus include global economic developments, domestic demand trends, and labour market dynamics.

Conclusion

The RBA’s decision to hold rates steady at 4.35% reflects its cautious approach to managing an economy that faces conflicting pressures. While progress has been made in reducing inflation, underlying challenges in growth, productivity, and global uncertainties persist. The RBA’s resolve to guide inflation back to target underscores its long-term commitment to economic stability, but achieving this balance will require careful navigation in the months ahead.

AUD/USD Technical Analysis 

• Downtrend Dominance: The moving averages (50, 100, and 200) are sloping downward, confirming the strong bearish momentum. Price action remains below all major moving averages, signaling a continuation of the downward trend.
• Break of Structure (BOS): Multiple BOS points are marked, indicating key levels where the price has broken previous support zones, validating the ongoing bearish trend.
• Change of Character (ChoCh): A minor change of character is observed near recent price action, suggesting a potential short-term reversal or consolidation phase.
• Resistance Zone: The area around 0.6480–0.6520 serves as a strong resistance, marked by historical price rejections. This level aligns with the stop-loss position indicated on the chart.
• Support Levels:
  • The primary take-profit zone is at 0.6259, highlighting a crucial support area where sellers may look to close their positions.
  • Secondary support levels are observed at 0.6334 and 0.6372, aligning with the Fibonacci retracement levels drawn on the chart.
• A Fibonacci retracement is drawn from a recent high to the swing low, suggesting key levels for price retracements. The price is currently hovering near the 38.2% retracement level (0.6435), which often acts as a significant resistance during corrective moves in a downtrend.
• MACD Histogram:
  • The histogram is slightly bearish but shows signs of weakening momentum. This could indicate a possible retracement or consolidation in the short term.
• RSI (Relative Strength Index):
  • The RSI is below 50, confirming bearish momentum. However, it is not in the oversold zone, suggesting there is still room for the price to drop further before a significant reversal might occur.

1. Bearish Continuation:
   • If the price breaks below 0.6372, it will confirm further downside momentum toward the primary take-profit level at 0.6259.
2. Short-Term Reversal:
   • A break above 0.6480 (stop-loss level) could invalidate the bearish setup, potentially leading to a retest of the 0.6520–0.6550 resistance zone.