CBA’s economics team has lowered its interest rate guidance in the wake of Tuesday’s monetary policy meeting.
CBA now believes that Australia’s current cash rate of 4.10% is the peak with the “RBA to commence an easing cycle in Q1 24 with a total of 100bp of rate cuts next year”.
Key Points:
– The RBA Board on Tuesday held the cash rate steady at 4.10%, the second consecutive on hold decision.
– Higher interest rates are working, inflation is coming down and the activity side of the economy is slowing.
– We have shifted our base case and now expect the cash rate to remain on hold at 4.10% for an extended period.
– Upside surprises to inflation, wages and spending data would be required for the RBA to lift the cash rate again. Although the RBA is expected to retain a tightening bias, the hurdle appears high to another hike.
The Board left the cash rate on hold at 4.10% for the second month in a row.
The RBA left the cash rate on hold at 4.10% in August, against our expectations and the consensus of economists.
Financial markets in contrast had priced in only a small chance of a rate hike today.
In holding the cash rate steady, the same reasons as the July meeting were highlighted:
1. “Interest rates have been increased by 4 percentage points since May last year” and “these higher interest rates are working to establish a more sustainable balance between demand and supply”.
2. The RBA again highlighted “the uncertainty surrounding the economic outlook” in leaving the cash rate on hold.
3. Leaving the cash rate on hold will provide the RBA “further time to assess the economic outlook and the impact of higher interest rates”.
We had thought the RBA would raise the cash rate in August due to lingering concerns around the strong labour market and upside risks to inflation and wages growth.
We expected the path of least regret would be one final rate hike. Instead without explicitly highlighting it, the Q2 23 CPI print, softening consumer demand, together with the material lift in interest rates to date appears to have given the RBA comfort to pause again.
The August statement notes that “inflation is declining but is still too high at 6 per cent”.
“Prices of many services are rising briskly” is mentioned, as is elevated rent inflation. But upside risks to these prices are not mentioned although the RBA does note “Services price inflation has been surprisingly persistent overseas and the same could occur in Australia”.
The RBA expects CPI to continue to decline and be around 3¼% by end 2024 (forecasts appear unchanged since May) and within the 2%-3% target in late 2025 (forecast was 3% in June 2025, with forecasts to be extended to December 2025 in Friday’s Statement on Monetary Policy).
The strong June labour force data also does not appear to have changed the assessment of the labour market. It continues to be described as “very tight” with conditions having eased a little.
A pick up in the unemployment rate to around 4½% in late 2024 is expected, from the current 3½%, again we think this is unchanged from the forecast in May.
On wages growth the RBA notes “at the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up”. Although uncertainties remain about “how firms’ pricing decisions and wages will respond to the slowing in the economy at a time when the labour market remains tight”.
Current wages data remains in line with wage growth peaking below 4%, but it is not until the Q3 23 Wage Price Index print in November that we will see the impact of the award wage decision.
The forward guidance remained unchanged in August, and is the same as it was since May.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe”. But the qualifying sentence has been slighted altered to “but that will depend upon the data and the evolving assessment of risks”.
Therefore, while the RBA retains a tightening bias, we expect the hurdle to another rate is high.
It would take an upside surprise to the economic data from here, namely on prices and/or wages, for the RBA to shift its assessment of the outlook.
Our base case now is for the RBA to be on hold at 4.10% for an extended period. Although we acknowledge that the risk remains for another rate hike based on the forward guidance and the resilience in the labour market.
Between now and the September RBA Board meeting (06/09) the data flow that could shift the RBA to hike again would be the Q2 23 Wage Price Index (15/08) and monthly CPI print (30/08).
At this stage we don’t expect this data to shift the risks to the outlook for prices and wages to the upside.
Instead we expect the consumer side of the economy to continue to soften under the weight of the material lift in interest rates to date, the roll off of fixed rate mortgages and negative real household disposable income.
We continue to expect the RBA to commence an easing cycle in Q1 24 with a total of 100bp of rate cuts next year.
We expect the economy to have slowed, inflation to have move down closer to target and the labour market to be softening to prompt the start of the easing cycle.
Our rate cut profile would see the cash rate sit at 3.10% at the end of 2024, which we consider a more neutral setting.
We expect a rate cut each quarter in 2024and at this stage we favour the March meeting (18-19 March) for the first rate cut.
This would imply a 9 month gap between the last rate hike (ie. June 2023) and the first rate cut under the new RBA Board meeting timetable.
