The Board noted that inflation, although substantially reduced from its 2022 peak, continues to hover above the 2-3 per cent target range. Recent data indicate a slowdown in the decline of inflation, with the Consumer Price Index (CPI) rising by 3.6 per cent over the year to April, and by 4.1 per cent excluding volatile items and holiday travel, the board said in a statement.

Broader economic indicators suggest ongoing excess demand and elevated domestic cost pressures. Despite some easing in labour market conditions, they remain tighter than is consistent with full employment and target inflation levels. Wage growth, while peaking, remains higher than sustainable levels given trend productivity growth.

Revised data shows stronger than expected consumption over the past year, though output growth has been subdued and consumption per capita has declined. Households are restraining discretionary spending as inflation impacts real incomes.

The economic outlook remains uncertain, with central forecasts predicting inflation will return to the target range in the second half of 2025 and reach the midpoint in 2026. However, recent data indicates weak economic momentum, slow GDP growth, a rising unemployment rate, and slower-than-expected wage growth.

Additionally, revised consumption and saving rates and persistent inflation suggest upside risks. Recent budget outcomes may influence demand, though federal and state energy rebates will temporarily lower headline inflation.

There is significant uncertainty surrounding consumption growth. Real disposable incomes have stabilised and are expected to grow later this year, supported by lower inflation and tax cuts. An increase in wealth driven by rising housing prices is also expected to boost consumption. Nonetheless, there is a risk that household consumption may grow more slowly than anticipated, potentially leading to subdued output growth and labour market deterioration, the statement added.

Global economic uncertainties persist, with output growth in advanced economies appearing to have bottomed out. There are improvements in the economic outlook for China and the US, and many commodity prices have increased. Some central banks have eased policies, though they remain cautious about persistent inflation. Geopolitical uncertainties, especially those related to conflicts in the Middle East and Ukraine, remain elevated and could impact supply chains.

The Board reiterated its commitment to returning inflation to the target range, aligning with the Reserve Bank's mandate for price stability and full employment.

Fibre2Fashion News Desk (KD)