Dynamic Business Logo
Home Button
Bookmark Button

Source: Spelio on Flickr

SMEs treading water as RBA holds rates steady

The Reserve Bank of Australia (RBA) announced today that it will maintain the cash rate at 4.35%, aligning with market expectations and affirming predictions from leading economic forecasters, including Deloitte Access Economics.

This cautious stance underscores the RBA’s continued vigilance over inflationary pressures, particularly as it seeks more definitive progress towards its long-term inflation target.

While headline inflation appears to be cooling—with a drop to 2.8% in September from 3.8% in June—the RBA noted that much of this improvement stemmed from short-term factors, such as easing fuel and electricity prices and temporary cost-of-living adjustments. The central bank’s focus remains on underlying inflation, with its preferred metric, the trimmed mean, still elevated at 3.5%. To consider a rate cut, the RBA requires further evidence that this measure will stabilize within its 2-3% target band.

Alongside its rate announcement, the RBA released its latest Statement on Monetary Policy, offering fresh insights into inflationary dynamics and international comparisons. According to the RBA, Australia holds the second-highest rate of underlying inflation among major advanced economies, a situation attributed to the nation’s relatively delayed onset of post-pandemic inflation and a more gradual pace of rate hikes compared to other central banks.

Australia’s Supply and Demand Dynamics

The RBA’s economic outlook maintains that Australia’s aggregate demand remains strong, slightly outstripping the economy’s supply capacity. Deloitte Access Economics, however, has expressed skepticism, arguing that Australia may be closer to an economic balance than the RBA suggests. The OECD has recently noted that Australia’s demand might actually be trailing supply—a gap it expects to widen over the next year.

Labor market indicators add further complexity to the economic landscape. Although employment growth remains robust, recent job gains have predominantly occurred in non-market sectors. Job vacancy rates have been falling, and unemployment has ticked up slightly, suggesting a gradual cooling in the labor market. Wage growth, while present, remains modest, meaning wage gains are unlikely to add to inflationary pressures.

Rising Government Spending

Government spending, which hit a record 27.3% of GDP in the June quarter, poses an added challenge for the RBA. Higher spending has provided essential support for households but could also stoke inflationary pressures. The RBA acknowledged that it underestimated this rise in public sector outlays, which has become a notable factor in its forecast adjustments; the central bank now does not expect core inflation to return to its target until mid-2026.

Effect on SMEs

While the decision to hold rates steady is a positive development, SMEs continue to face challenges from persistent inflation and economic uncertainty. Elevated interest rates have squeezed profit margins and hindered investment plans for many businesses.

The RBA’s decision comes as headline inflation has eased, but the central bank remains vigilant about underlying inflationary pressures. As the economy navigates these complexities, SMEs will need to carefully manage their finances, explore cost-cutting measures, and adapt to changing market conditions.

For now, the RBA remains cautious, with its board stating, “sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority.” While it remains undecided on future rate movements, many analysts, including Deloitte Access Economics, anticipate a rate cut as early as February 2025, should inflation continue its downward trajectory.

As the RBA navigates a fine line between supporting growth and containing inflation, all eyes remain on the economy’s ongoing adjustment to both domestic and global pressures. The next few months will be pivotal in determining whether further monetary policy easing can be confidently implemented in the new year.

Keep up to date with our stories on LinkedInTwitterFacebook and Instagram.

What do you think?

    Be the first to comment

Add a new comment

Yajush Gupta

Yajush Gupta

Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.

View all posts