By Gareth Aird, head of Australian economics at CBA:
Key Points:
- The RBA Board today left the cash on hold at 3.60%, as we expected.
- Forward guidance has further shifted in a dovish direction and 3.60% may be the terminal rate in this cycle.
- The Board expects that “further tightening of monetary policy may be needed to ensure that inflation returns to target”.
- We have left our central scenario unchanged. We have one final 25bp rate hike in our profile, likely to be delivered in May, for a peak in the cash rate of 3.85% – monetary policy will sit deeply in restrictive territory.
- The budgets of many home borrowers will be under considerable strain over the coming year. We continue to expect 50bp of rate cuts in Q4 23 and a further 50bp of easing in H1 24.
- Governor Lowe will deliver a speech on Monetary Policy, Demand and Supply at the National Press Club tomorrow (12.30pm AEST).
The RBA leaves the cash rate unchanged and makes another shift in the dovish direction
The RBA Board today left the cash rate unchanged, as we had anticipated. It was the first ‘on hold’ decision since the tightening cycle began in May 2022.
We did not have high conviction in our call heading into today’s meeting and thought it would be a close call (between on hold or a 25bp rate hike). That uncertainty was mirrored by a divided forecasting community. According to the Bloomberg survey, 19 analysts expected no change to the cash rate and 11 forecast a 25bp rate hike. The money markets had priced a ~20% chance of a 25bp rate increase.
The Governor’s Statement indicates that the decision to leave the policy rate on hold may not have been as close a call as we thought. We make that observation because the Governor further watered down the key sentence that relates to forward guidance.
In the March Statement accompanying the Board decision it was stated that, “the Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target”.
Today that sentence was changed to, “the Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target.” (our emphasis in bold).
The Governor has inserted the word “some” before the word “further”. And more importantly the word “will” has been replaced with “may”.
These changes indicate that the RBA Board is less convinced that they will hike the cash rate again. To be clear, the Board has still retained a hiking bias, as we anticipated. But it is a more watered down version of the previous statement.
On inflation, the Governor once again referenced the monthly CPI. But he also noted that, “a range of information, including the monthly CPI indicator, suggests that inflation has peaked in Australia.” This statement is supported by the NAB Business survey, Judo/S&P Australian Composite PMI and Melbourne Institute monthly inflation gauge.
The RBA at this stage have made no changes to their inflation profile. The Governor stated today that, “the central forecast is for inflation to decline this year and next, to around 3 per cent in mid-2025.” We expect inflation to recede more quickly than the RBA and forecast it to be 3½% by end 2023.
It is interesting that the Governor noted that, “there is further evidence that the combination of higher interest rates, cost-of-living pressures and a decline in housing prices is leading to a substantial slowing in household spending.” We say interesting because the Corelogic data yesterday indicated that dwelling prices increased over March. It looks like the negative wealth effect on consumption is likely to wane from here. But we expect the lagged impact of rate hikes on home borrower cash flow to weigh significantly on consumption even if home prices do not fall further.
There are a number of key data releases to print before the May Board meeting. The most important will be the Q1 23 CPI (26/4). The other top tier data to drop over coming weeks is the March labour force survey (13/4). Unfortunately there is no update on retail trade before the May Board meeting. That release (i.e. March retail trade) prints the day after the May Board meeting (3/5). The business surveys will once again be an important secondary input into the May policy decision.
We said in our preview note that, “a pause in April coupled with a hiking bias makes a lot of sense. And that is now our base case. If the RBA delivers on this outcome we will retain our call that the terminal rate will be 3.85% in this cycle. But we would then state the risk to our view is that the hiking cycle is over and the next move is down.”
We stick with this statement and we retain our central scenario that the terminal rate will be 3.85%. We believe the risk to our call is that the current 3.60% cash rate is the peak in this cycle and the next move is down. We continue to expect 50bp of easing in Q4 23 followed by a further 50bp of rate cuts in H1 24.
The Governor is speaking tomorrow (Wednesday 5 April) on Monetary Policy, Demand and Supply at the National Press Club tomorrow (12.30pm AEST). Governor Lowe will have the opportunity to more fully flesh out the RBA’s latest thinking on the economy and outlook for monetary policy.
