By Gareth Aird, head of Australian economics at CBA:
Key Points:
- The December 2023 Board Minutes were the last scheduled piece of communication from the RBA until the all-important February 2024 Board meeting.
- The Minutes state the Board once again debated the case to raise the cash rate or leave policy on hold. We believe the decision to leave the cash rate unchanged in December was straight forward.
- The recent domestic economic data indicates the economy is slowing more quickly than the RBA anticipated in November when it published its updated economic forecasts.
- We remain comfortable with our base case for an easing cycle to commence in September 2024.
Board Minutes suggest RBA less confident on their forecast profile for the unemployment rate:
The December Board Minutes were the last scheduled piece of communication from the RBA until the all-important February 2024 Board meeting. As such, the Minutes were the last opportunity the RBA had to guide the market ahead of the first Board meeting next year.
The Minutes did not make any observations in our view that shift the near-term outlook for policy.
The Q4 23 CPI, to be published on 31 January, will make or break the case for the RBA to hike the cash rate again in February 2024.
The RBA has forecast the Q4 23 trimmed mean to be ~1.0%/qtr. We believe it would take an outcome of 1.2%/qtr or above for the RBA to increase the cash rate in February (1.1%/qtr is the ‘grey area’ and 1.0%/qtr or below is a clear lock in our view for policy on hold).
Note that our preliminary forecast for the Q4 23 trimmed mean CPI is 0.9%/qtr.
The Minutes today confirm that the Board once again considered two options for monetary policy in December: raising the cash rate target by a further 25bp or holding the cash rate target steady. These two options have been considered at each of the last eight Board meetings.
The case to leave the cash rate target unchanged in December was obviously the stronger one, which underpinned the policy outcome. Indeed, we believe the decision to leave the cash rate on hold in December was straight forward.
It was interesting that the Minutes note, “the case to hold the cash rate target constant reflected the view that the data over the prior month did not warrant a material revision to the outlook and that there is the possibility of a larger rise in the unemployment rate than anticipated” (our emphasis in bold).
The RBA downwardly revised their unemployment rate forecasts in the November Statement on Monetary Policy (SMP). At the time we thought that forecast adjustment was not necessary. And we stated, “we expect the jobless rate to rise a little more swiftly than the RBA over 2024”.
The direction of travel of the unemployment rate is a critical input into RBA policy deliberations. The recent labour force data has likely caused the RBA to question their forecast profile for the unemployment rate.
At the time of the November SMP the latest data for the unemployment rate was 3.6% in September. Last week the ABS reported that the unemployment rate was 3.9% in November. And the unemployment rate for October was upwardly revised from 3.7% to 3.8%. A 0.3ppt increase in the jobless rate over two months is significant.
Last week we published a note that discussed how the Australian economy is slowing more quickly than the RBA anticipated in November when it published updated economic forecasts.
Our suspicion is that the RBA has wanted to subtly convey today that the economy has indeed slowed more than they expected in November. As such, they included the statement that there is the possibility of a larger rise in the unemployment rate than anticipated.
In their discussion on the case to raise the cash rate by 25bp in December it was noted that, “domestic demand was judged still to be running above the level consistent with the inflation target”. We don’t read too much into that.
The Q3 23 national accounts were published after the December Board meeting. And this data showed domestic demand softer than the RBA had anticipated – particularly around the consumer.
The potential for the RBA to embark on quantitative tightening reared its head again today – “members discussed a paper that reviewed the Bank’s approach to reducing its holdings of government bonds that had been purchased during the pandemic to support markets and provide economic stimulus.”
But it was also stated that, “members decided that the approach of holding the bonds to maturity remained appropriate but agreed to keep this under active consideration, including because of the Bank’s exposure to interest rate risk and given the relatively gradual decline in the Bank’s portfolio of bonds compared with some other advanced economy central banks.”
Our assessment is that the Board is simply doing its due diligence in reviewing its approach to its balance sheet. But we don’t expect any changes to the current approach.
Next year the RBA meeting schedule will move to every six weeks (i.e. eight meetings a year, as compared with the previous eleven meetings per year). But more importantly for the outlook for policy will be the establishment of a new Monetary Policy Board and the disclosure of unattributed votes.
The new Monetary Policy Board is likely to commence from July next year.
The RBA will continue with their inflation fighting rhetoric for some time. And their hiking bias was reiterated today: “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 against the backdrop of rising unemployment and falling GDP per capita the Board will be quite reluctant to tighten policy further. Indeed, the need for further rate rises has dissipated.
Our base case is unchanged. While the near-term risk sits with another 25bp rate hike at the February Board meeting we see the RBA on hold.
We continue to expect an easing cycle commencing 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%.
This is the final note of 2023 from the Australian Economics team. Our 2024 Australian economic outlook note will be published in mid-January.
I would like to wish all of our readers a happy and healthy Christmas and New Year.
