By Gareth Aird, head of Australian economics at CBA:
Key Points:
- The RBA Board today left the cash rate on hold at 4.35%, as was universally expected.
- The Board has retained a tightening bias as we anticipated, though the language has shifted a little: “a further increase in interest rates cannot be ruled out”.
- The RBA has downwardly revised its end-24 inflation forecast from 3.5% to 3.2%. Inflation is forecast to get back to the target range in H2 25 and to be around the midpoint by mid-26.
The Statement maintains a hawkish tilt – Board in no hurry to declare inflation fight over:
The RBA Board today left the cash rate unchanged. The move was anticipated by financial markets and the entire forecasting community.
The decision to leave the cash rate unchanged for the second straight meeting was uncomplicated. The Q4 23 CPI indicated that more progress has been made in returning inflation to target than the RBA expected when it published its inflation forecasts in November 2023.
In addition, economic growth is slowing more quickly than the RBA anticipated.
The on-hold decision meant that the focus for market participants was on the Statement accompanying the decision and the updated economic forecasts (note that the Statement was from the Board today rather than the Governor – this will be the case going forward).
The RBA Board retained a tightening bias, as we anticipated.
The Statement noted that, “the path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out.” (our emphasis in bold).
The hiking bias is a little different to the previous one, which read “whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks”.
But the differences are immaterial. We do not expect the RBA to act on its hiking bias.
As our preview noted, the RBA will likely wish to keep the tightening bias for a little longer for their communication strategy. The Governor and Deputy Governor do not just communicate with market participants. They communicate with households, businesses and policymakers (i.e. government).
Maintaining a tightening bias signals to the fiscal authorities that it’s too early to declare the inflation fight over. The RBA would not wish to see fiscal settings loosened until further progress on inflation has been made towards the target band.
The Statement made significant mention of a ‘highly uncertain outlook’. Indeed five references were made to ‘uncertainty’ in the Statement.
A ‘highly uncertain outlook’ is another way or the Board communicating that it is not on a pre-set path and that it is not dogmatic about the economic outlook. This makes it easier for the RBA to shift its communication or ‘pivot’ if the data makes the case.
The RBA’s updated inflation forecasts were in line with our expectations. Headline inflation in Q4 24 is forecast to decline to 3.2% (from 3.5% previously).
And underlying inflation is forecast to fall 3.1% over the period (from 3.3%).
Inflation is expected to be back around the midpoint of the target band by mid-26 (note that the updated economic forecasts assume the cash rate remains around its current level of 4.35% until mid-24 before declining to around 3.25% by mid-26).
The RBA has upwardly revised its unemployment rate forecasts a little. The unemployment rate is expected to end the year at 4.3% and to peak at 4.4% in mid-2025. We suspect that the RBA does not wish to see the unemployment rate move above 4.5%.
The forecast for GDP growth is softer than three months ago, largely reflecting a weaker outlook for household consumption in the near term.
The Statement on Monetary Policy (SMP) makes an important distinction between the rate of change and the level of activity. It states, “while growth in demand has slowed, the level of demand is still robust and is assessed to be above the economy’s capacity to supply goods and services, thereby creating inflationary pressures”.
This suggests that it will take more than just weak economic growth for the RBA to entertain the idea of policy easing. The unemployment rate will likely need to rise a little more quickly than the RBA anticipates and inflation will need to fall a little faster.
We expect both of those outcomes to transpire and we remain comfortable with our base case.
Our central scenario sees the RBA commence an easing cycle in September 2024 (we have 75bp of rate cuts in our profile in late 2024 and a further 75bp of easing in H1 25, which would take the cash rate to 2.85%).
