Introduction to Interest Rates
The Reserve Bank Governor, Michele Bullock, has provided insight into the central bank’s decision to keep interest rates on hold. In a recent speech to the Anika Foundation, Bullock stated that there has been "meaningful progress in bringing inflation down." However, the Reserve Bank is waiting for confirmation that underlying inflation has moved back towards the mid-point of its 2% to 3% target band.
The Dual Mandate
The Reserve Bank has a dual mandate of inflation and employment. The bank’s monetary policy board is charged with setting monetary policy in a way that contributes to price stability in Australia and the maintenance of full employment. Full employment has been a goal of the central bank since the 1940s. The Reserve Bank Act requires the bank to balance these two goals when making decisions about interest rates.
Balancing Inflation and Employment
The governor emphasized that low and stable inflation is a prerequisite for strong and sustainable employment growth. In the long run, there is no conflict between these goals. However, there are times when the implications from the two goals clash, such as during a surge in oil prices. The bank’s response may depend on the likely longevity of such a shock.
Are the Twin Goals in Conflict or Complementary?
In the short run, the two goals often involve no conflict. When the economy is overheating, inflation is high and unemployment is low, so it is clear that interest rates should be raised. During a recession, inflation is low and unemployment is high, so it is clear that interest rates should be lowered. However, there are times when the bank must make difficult decisions to balance these competing goals.
The Outlook
The Reserve Bank has cut interest rates twice this year and has indicated that policy is leaning towards further cuts by the end of the year. The bank’s latest published forecasts suggest that if it lowers its cash rate target to 3.4% by the end of the year, then unemployment would rise marginally, to 4.3%, while underlying inflation drops to 2.6%. The Reserve Bank will release its updated forecasts after its next policy meeting on August 12, when it is also expected to cut interest rates.
Better Monthly Inflation Data on the Way
The Reserve Bank governor has made clear that she regards the quarterly inflation series as a better guide than the current monthly series. However, the Australian Bureau of Statistics has announced that it is upgrading the monthly consumer price index (CPI) with effect from the October 2025 reading. This will provide more frequent and timely data on inflation, which will help the bank make more informed decisions about interest rates.
Conclusion
In conclusion, the Reserve Bank’s decision to keep interest rates on hold is a complex one that balances competing goals of inflation and employment. The bank is waiting for confirmation that underlying inflation has moved back towards its target band before making further decisions about interest rates. With the introduction of new monthly inflation data, the bank will have more information to inform its decisions and help achieve its dual mandate of price stability and full employment. As the economy continues to evolve, it will be important to monitor the bank’s decisions and their impact on the economy.
