About Monetary Policy

2024 amendments to the Reserve Bank Act 1959

The Reserve Bank of Australia is responsible for formulating and implementing monetary policy. Its Monetary Policy Board sets the target cash rate, which is the interest rate on overnight loans in the interbank market. The cash rate shapes loan and saving rates, which usually move in tandem.

The overarching objective is to support the economic prosperity and well-being of the Australian people, both in the present and over the long term.

DUAL MANDATE GOALS:

1. price stability in Australia; and

2. the maintenance of full employment in Australia.

Current Economic Condition

Key Sources of Uncertainty

US tariffs will reduce demand for Australian exports.

The United States has imposed a 12.5% tariff on most Australian origin goods, causing US consumers and businesses to pay 12.5% more when purchasing Australian products. The direct impact is likely small, given that only 6% of Australian exports are destined for the United States. However, an average 30% or higher tariff has been imposed on China, Australia’s largest trading partner. Slowing economic growth in China could potentially reduce its demand for Australian exports. Therefore, the indirect impact on Australia’s economy remains uncertain.

Trade tensions increase policy uncertainty.

Heightened policy uncertainty typically prompts households to increase precautionary savings and leads businesses to postpone investment decisions, potentially dampening economic growth.

Labour market remains tight relative to full employment.

Demand for workers continues to outpace the available supply, contributing to a tight labour market. Both the unemployment rate and underemployment rate are below their average levels over the past few decades. The labour market and output growth are currently in a phase of recovery.

The unemployment rate tracks those who are looking for a job but don’t have one, and the underemployment rate tracks those who have a job but want to work more hours.

Underlying inflation anchors above the target range.

The conflict in the Middle East has driven fuel and related commodity prices sharply higher, already adding to inflation. Firms facing higher costs are raising prices of their goods and services. AI-driven demand is fueling a notable rise in global prices for technology-related goods. Inflation is now anticipated to remain elevated through much of 2027.

Price Stability And Inflation

Consumer Price Index – MONTHLY INDICATOR 4.3%

RBA’s Latest Statement
Energy and most related commodity prices remain elevated amid the escalation of the Middle East conflict. Disruption to global oil supply is adding directly to inflation, and higher fuel costs are passing through to a wider range of goods and services, keeping inflation high for now. Firms experiencing higher input costs are increasing the prices of their goods and services, with more expected to follow. Headline inflation is expected to remain above 3 per cent for the rest of 2026 and is not projected to return to the middle of the 2-3 per cent target range until mid-2028.

The RBA implements a flexible inflation target to maintain consumer price inflation between 2% and 3%.

Inflation is the rise in prices of goods and services that households commonly purchase. A key lesson from history is that low and stable inflation is a prerequisite for a strong economy, sustained full employment, and growth in real wages.

The Consumer Price Index (CPI) is the most widely recognized measure of inflation in Australia. It captures the percentage change in prices of a basket of goods and services that encompasses thousands of items typically purchased by Australians, categorized into 11 groups.

Headline and Underlying Inflation
Headline inflation reflects the prices of all goods and services in the Consumer Price Index, whereas underlying inflation excludes unusually large or volatile price changes.

Economic Growth

Australian National Accounts

Economic growth is the term used to describe an increase in the size of a country’s economy over a period of time. The size of an economy is typically measured by the total production of goods and services, known as gross domestic product (GDP).

The latest quarterly reading of nominal GDP shows a 0.8% increase. Australia’s GDP growth is still projected to improve, but at a slower pace than earlier anticipated. While leading indicators have not shown significant deterioration, the expected recovery is likely to be more subdued due to “softer global demand” and “weaker momentum in consumer spending”.

Higher domestic prices from rising labour costs in public and private sectors have weakened demand. Price increases for services including health, education and rent have reduced consumer spending power. Strong fuel price growth this quarter has also raised costs and lowered domestic final demand. If the RBA lowers cash rates, the dampening effects of weaker demand would be partly offset.

The imposition of tariffs by the United States has increased uncertainty in global trade conditions. Although Australia’s direct exports to the US are limited, the broader effects of these tariffs on global supply chains may indirectly worsen Australia’s trade balance and economic outlook.