By Stephen Wu, Economist at CBA:
Key Points:
- The Minutes struck a largely similar message to previous recent RBA communications.
- The RBA are still of the view that the economy is on the ‘narrow path’ despite some minor shifts to the risk profile.
- Our base case remains the current cash rate of 4.1% is the peak in this cycle.
RBA Board Minutes show the hurdle to hike again is high
The RBA Minutes for September released yesterday largely struck a similar message to previous recent RBA communications.
The Minutes affirm our view that the current cash rate of 4.1% is likely to be the peak in this cycle. The RBA last hiked the cash rate in June.
We consider the hurdle to hike the cash rate again is high. But, risks to the central scenario are still present. The RBA will closely watch the economic data flow, particularly as it relates to inflation, the labour market, household spending and global developments.
The RBA maintained its tightening bias. The final paragraph of the Minutes continued to note that ‘some further tightening in policy may be required’. The previous caveat that further tightening would ‘depend on the data and the evolving assessment of risks’ has now become a more explicit ‘should inflation prove more persistent than expected’.
We have noted previously an upside surprise to the RBA’s inflation profile is needed for the RBA to judge another rate hike is warranted. The guidance in August that further tightening was ‘possible’ was removed.
The recent increase in oil prices is an upside risk to the inflation outlook. The RBA’s forecasts in August, including for inflation, were based on a technical assumption of Brent crude oil price at US$80bbl. Global oil prices have increased substantially in recent weeks. Brent oil price is now just under US$95bbl.
Downside risks to the Chinese economy were judged to have increased since August. And domestically, recent data suggested spending growth remained weak and the risk is still that consumption growth slows by more than expected.
These minor shifts in the risk profile have not been enough to alter the RBA’s central scenario for the economy.
The Minutes noted that ‘recent developments had not materially altered the outlook or [members’] assessment that the economy still appears to be on the narrow path by which inflation comes back to target and employment continues to grow’.
As before, the RBA Board in September considered both the options to increase the cash rate by 25bps or to keep the cash rate unchanged.
And as before, the argument to hike the cash rate again remained the risk should high inflation prove more persistent than expected, potentially causing inflation expectations to rise.
But the case to keep the cash rate unchanged remained stronger. The Minutes noted that ‘the recent flow of data was consistent with inflation returning to target within a reasonable timeframe while the cash rate remained at its present level. Members recognised the value of allowing more time to see the full effects of the tightening of monetary policy since May 2022, given the lags in the transmission of policy through the economy’.
We expect the data over the rest of the year to show the economy slowing further and inflation falling faster than the RBA expects.
The case to keep the cash rate unchanged should only grow from here to year-end. Since the September Board meeting, the Q1 23 National Accounts and the August labour force survey were released.
The National Accounts confirmed the RBA’s expectation of a further decline in per capita consumption. And the unemployment rate remaining unchanged at 3.7% in August, although low by historical standards, indicates a loosening in labour market conditions.
Ahead of the October RBA Board meeting – the first with Michele Bullock as Governor and Chair – there are some important pieces of economic data due.
The CPI indicator for August (27/9) will be the key focus. Higher oil prices, refining margins, and the weaker Australian dollar contributed to an 8-12% increase in petrol and diesel prices in the month and will mechanically add ~0.3ppts to monthly inflation.
The August figure will also provide inflation readings on many market services. The RBA is concerned about sticky services inflation.
The other important piece of data will be the August retail trade sales (28/9).
