RBA holds rates as softer inflation eases pressure

The Reserve Bank of Australia has left the cash rate on hold as softer-than-expected core inflation eases immediate pressure for further monetary tightening. Economists and business leaders said the decision extends a period of stability, but warned that structural pressures on prices and employers remain.

Trimmed mean inflation rose 0.8% quarter on quarter in the June quarter, slightly below market expectations of 0.9%. Monthly core inflation increased 0.28% in June, also just under consensus forecasts. CreditorWatch Chief Economist Ivan Colhoun said the second straight 0.8% quarterly rise in the trimmed mean suggested underlying price growth was running closer to 3.25% before the escalation of conflict in the Middle East, rather than the Reserve Bank's 3.5% assessment. That gave the board a little more breathing space.

Colhoun said the recent inflation data matched a pattern seen in other advanced economies. The pass-through from higher fuel prices into core measures has been slower than during the pandemic. Headline inflation fell more sharply as petrol prices declined through June, with fuel down 11% month on month after a 12% drop in May.

Those declines also flowed through to related items such as postal charges as fuel surcharges unwound. Colhoun noted that higher fuel costs in recent weeks would likely lift headline readings again in coming months. He argued that the design of surcharges meant any eventual resolution in the Middle East could limit how long the inflation shock lasts.

Despite the short-term relief, Colhoun said the broader inflation task remains unfinished. Only about 10% of the consumer price index basket is currently tracking below the RBA's target band, while about 47% is running above 4%. A further 43% is in the 2.8% to 3.1% range.

Housing-related items remain a particular concern. Rents and new dwelling construction costs continue to rise at rates well above target. Wage growth of about 3.5% to 4%, and more for workers affected by the Fair Work Commission's 4.8% minimum award wage increase, is also adding to cost pressures. Colhoun said the central bank still believed demand growth must slow further for inflation to return sustainably to the midpoint of its target range.

The RBA governor signalled a hawkish stance in a speech before the latest inflation release, saying the board remained prepared to tighten again if needed, while also acknowledging policy lags, softer housing conditions and rising unemployment. Colhoun said the latest data would likely give the board more time to assess how existing settings are affecting the economy.

He still expects some additional tightening later this year. At the same time, current interest rate levels do not appear far from appropriate based on the latest data and the balance of risks, he said.

For small and medium-sized employers, the cash rate pause offers partial relief rather than a turning point. Ben Thompson, Founder and Chief Executive Officer of payroll and HR platform Employment Hero, said wage pressures remain elevated across the small business labour market.

Wages in the small business sector rose 1.2% month on month in July, according to Employment Hero's latest figures, even as employment levels remained largely unchanged. Thompson said many owners now see regulatory complexity and administrative workload as bigger constraints than borrowing costs.

"The RBA's decision to hold rates will provide some welcome certainty for Australian small and medium businesses, but stability alone won't solve the mounting pressure employers continue to face. Our July Jobs Report shows the SMB labour market remains resilient despite ongoing wage pressures, with wages increasing 1.2% month-on-month in July. While employment remained broadly stable, we're increasingly hearing from business owners that their confidence is being constrained less by interest rates and more by the growing complexity of running a business, from compliance and employment obligations to the admin burden that pulls owners away from growth. That's why Australia needs to think bigger than the next rate decision. We're entering an era where AI has the potential to fundamentally change what a small business can achieve, make them vastly more competitive than their larger competitors, and help them do more without adding more costs. But businesses can only realise those gains if they're given the time and confidence to embrace new ways of working. If we want Australia's small business sector to become more productive and more competitive, we need to reduce the friction that holds entrepreneurs back while making emerging technologies like AI more accessible. That's where the next wave of business growth will come from, not simply lower interest rates, but creating an environment where innovation is easier than administration," Thompson said.