By Gareth Aird, head of Australian economics at CBA:
Key Points:
- The RBA Board today increased the cash rate by 25bp to 4.35%, as was widely expected.
- The Board retains a tightening bias, but it has been watered down a little: “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.”
- The RBA has upwardly revised their end-24 inflation forecast. But they have retained their forecast that inflation does not get back to the top of the target range until late-2025 (we expected both of these occurrences).
- We don’t anticipate any further increases to the cash rate, but acknowledge the near-term risk sits with another 25bp rate hike.
The Board delivers a 25bpCup Day rate hike—forward guidance a touch softer:
The RBA Board today increased the cash rate by 25bp to 4.35%. The move was largely anticipated by financial markets and the forecasting community.
According to the Bloomberg survey, 29 analysts expected a 25bp increase in November and only 3 forecast no change. The money markets had priced a 75% chance of a 25bp rate increase today (pricing firmed over the last 24 hours).
The justification for the rate increase was clear: “The Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.”
The increase in the cash rate today allowed the RBA to retain their forecast for inflation to be at the top of target range of 2-3% by the end of 2025. But the end-2024 inflation forecast was upwardly revised to 3½% (from 3¼% previously).
Our preview stated that we thought we would see both of these forecast outcomes from the RBA today.
The RBA has downwardly revised their forecast for the unemployment rate a little. The unemployment rate is expected to rise gradually to around 4¼% (from 4½% previously).
The downward revision to the unemployment rate, whilst retaining the forecast for inflation to return to the top of the target band by the end of 2025 implies a lower estimate of the NAIRU (non-accelerating inflation rate of unemployment).
It might be the case that the RBA’s forecasters expect underutilisation to rise by more than is implied by looking at the unemployment rate alone (i.e. a greater lift in underemployment).
The Governor retained a tightening bias. But it has been softened a little. In the Governor’s Statement accompanying the October Board meeting when the central bank paused, it was noted that, “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe.”
Today that line was modified to, “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.”
Replacing ‘some’ with ‘whether’ on one level appears trivial. But with all RBA communication, it is all about what has been changed or tweaked. And by extension the message the modification conveys.
We interpret the change in words today to be in the dovish direction. The other change in the key paragraph that relates to forward guidance was a tweak to what the Board will pay close attention to in making its upcoming policy decisions.
In October, the Governor stated that the Board will pay close attention to, “developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.”
Today, ‘trends in household spending’ was replaced with ‘trends in domestic demand’.
This shift here simply widens the scope of what the Board is monitoring. Trends in domestic demand includes household spending (indeed that is the biggest driver). But it also picks up trends in business investment, residential construction and public demand.
This change potentially means the RBA is keeping a close eye on any further developments in the fiscal space.
Note that the Government’s Mid-Year Fiscal and Economic Outlook (MYEFO) is due prior to Christmas. The RBA will release their November Statement on Monetary Policy (SMP) on Friday (11.30am).
The end-2023 forecasts will allow analysts to ‘back solve’ the RBA’s point estimates for key December quarter data. This means we can track how the economic data is printing relative to the RBA’s expectations over coming months.
It will require upside surprises on the economic data, particularly inflation, for the RBA to raise the cash rate again.
Our base case sees the RBA Board leaving monetary policy on hold from here. And we have pencilled in September 2024 for the start of a monetary policy easing cycle.
But we acknowledge the risk in the short run sits with another interest rate increase, particularly given the RBA retains a tightening bias.
The upshot is that markets will continue to price the near-term chance of another rate rise. We think the probability of a follow-up 25bp rate hike in December is quite low.
We doubt there will be enough evidence in the data to be released over the next month that would make the case for back-to-back rate increases.
February 2024 looks the more likely month if the RBA is going to pull the rate hike trigger again.
At the February 2024 meeting, the Board will have the Q4 23 CPI and a full suite of updated economic forecasts.
But our expectation is that there will be enough signs in the data by early next year for the RBA to conclude that a further increase in the cash rate is not warranted.
