The Reserve bank has kept the cash rate steady at 4.35 per cent, marking a year since the last change in the cash rate.
In reasoning for its decision, the RBA said the outlook remained highly uncertain.
“The forecasts published today are very similar to those published in August,” the statement said.
“The forecast path for underlying inflation reflects a judgement that aggregate demand remains above the economy’s supply capacity, evidenced by the persistence of underlying inflation, surveys of business conditions and ongoing strength in the labour market.
“A range of indicators suggest that labour market conditions remain tight, and while conditions have been easing gradually, some indicators have recently stabilised. Employment grew strongly over the three months to September, by an average of 0.4 per cent per month.”
It comes after annual inflation returned to within the Reserve Bank’s target 2-3 per cent band in late October, at 2.8 per cent, the first time it had done so since 2021.
The return to within target inflation drew criticism from some for being a false figure, with temporary energy relief and rental assistance measures masking real inflation.
Annual trimmed mean inflation – which excluded the significant falls in electricity and automotive fuel – sat at 3.5 per cent in September.
RBA forecasts released today predict trimmed mean inflation to return to the 2-3 per cent target in June 2025.
Inflation is then expected to reach 2.5 per cent by late 2026.
"Underlying inflation is expected to ease slowly as demand in the economy moves back into line with supply," a statement from the RBA said.
"While headline inflation is expected to be in the target range in the first half of next year, part of this is due to temporary cost-of-living relief.
"The outlook is highly uncertain. On the one hand, if conditions in the labour market are stronger than expected and productivity growth remains weak, this could slow progress in bringing inflation to target.
"On the other hand, household spending might not increase as quickly as expected, which could mean that inflation returns to target faster. Heightened geopolitical risks and potential changes to trade and fiscal policies abroad add to this uncertainty."
Responses
HSBC chief economist Paul Bloxham said he now expected the first rate cut to come in Q2 2025.
"But we see an increasing risk that it takes even longer for cuts to be delivered or that the RBA misses the easing phase altogether," he said.
"This could come about because domestic inflation continues to fall only very slowly or because, by the time domestic inflation has eased sufficiently, the global economy is already re-inflating.
"Although not our central case, we ascribe a 25 per cent chance to the possibility that the RBA does not cut its cash rate at all in 2025."
Deloitte Access Economics lead partner Pradeep Philip likened today's decision to a "cautious punter stubbornly backing the favourite as the odds shift under it".
"Today's monetary policy decision shows the Reserve Bank of Australia is unwilling to walk away from high interest rates, even as the case for a rate cut continues to make up ground," he said.
"(It) does little to boost confidence as Australian businesses await the outcome of the US election in just over 24 hours.
"Despite growing global uncertainty, a slowing economy, and a continued downward trend in underlying inflation, Australian businesses and mortgage holders remain in lombo awaiting a rate cut."
Mr Philip disagreed with the RBA's assertion that inflation was being driven by demand.
"Not only is that contested by other organisations like the OECD, it is also clear that the biggest drivers of inflation remain supply side factors - such as a lack of housing, impacts of climate change on insurance premiums, and worker and skills shortages," he said.
"While we should never be comp0lacent on inflation, it is clear that interest rates have done their job. It is the supply side of the economy that should be the real focus when it comes to promoting growth, productivity, and fighting inflation.
"With decades low economic growth, perilously weak investment, a retail recession, and the lack of skilled workers in a tight labour market, the RBA risks getting caught between a weak economy and a looming federal election. Each month the job just get tougher."
AMP chief economist and head of investment strategy Shane Oliver said he also expected rates would be cut in February.
"(The RBA) will want to see another quarter of lower underlying inflation before having enough confidence that inflation is moving sustainably towards the target," he said.
"This means waiting for the December quarter inflation data which won’t come out till late January. That said we are heading in the right direction.
"A December rate cut is still possible, but it would require October monthly inflation data due late this month to show a further drop in trimmed mean inflation to less than 3 per cent year-on-year and for unemployment to have another leg up. On the other hand, we doubt that the RBA will have to wait all the way out to May to be confident enough on inflation to start cutting."
