RBA on hold, seeking sustainable disinflation
RBA remains on hold at 4.35% as expected. The Board remains vigilant to upside risks to inflation and wants to return it to target sustainably, not just briefly.
As expected, the RBA remained on hold at its September meeting, with the cash rate target kept at 4.35%. The media statement was broadly unchanged in tone; the shifts in language were mostly incremental. The statement repeated the language that the Board remains vigilant to upside risks and is not ruling anything in or out. A noteworthy revelation from the media conference, though, was that there was not an explicit consideration of a rate hike versus remaining on hold, as there was at the August meeting. Rather, the Board considered what would need to change to shift them from being on hold. We see this as indicating that the Board is a bit more firmly on hold than before. Given the uncertainties, though, it is still not willing to rule out rate hikes entirely.
The media statement acknowledged the decline in headline inflation and that there was more to come. In the media conference, Governor Bullock also acknowledged that headline inflation could print below 3% tomorrow. But the Board wants to see inflation sustainably in the 2–3% target range, not just temporarily. The language of the media release showed a clear pivot to emphasise trimmed mean as the key indicator of the trend in inflation. The media statement and subsequent media conference both highlighted that the RBA does not expect trimmed mean inflation to be sustainably in the target range until 2026.
The Board would have been reluctant to be too hawkish given the August monthly CPI indicator will be released tomorrow. This is expected to show headline inflation below 3%; our own nowcast and the market consensus is at 2.7%. But because much of this decline reflects temporary measures such as the electricity rebates and other cost-of-living measures, this is not enough to keep inflation in target. That said, it will have a welcome effect on people’s inflation expectations, as will the recent decline in petrol and other prices that have been shown to be salient in forming those expectations.
Another key (and promising) change in the language is that the statement no longer includes mention of wages growth exceeding the rate that can be sustained given current rates of growth in productivity. This has been replaced with the sentence, ‘Wage pressures have eased somewhat but labour productivity is still only at 2016 levels, despite the pickup over the past year.’ In the media conference, Governor Bullock described herself as a productivity optimist and attributed much of the softness in productivity here and abroad (except for the United States) as being partly a lingering effect of the pandemic. We would note that productivity in the market sector is already well above 2016 levels, and that this is more important for price setting than the economy-wide figure.
There was also a more prominent mention of the tightness in the labour market in the announcement. This lined up with the recent speech by Chief Economist Sarah Hunter, which stated that the labour market was still tighter than the RBA’s view of full employment. Robust employment growth and a consolidation in average hours, associated with record high labour force participation, has been met with only a gradual uptick in the unemployment rate. These are welcome outcomes for a Board that has committed to a policy strategy that puts more weight toward maintaining the employment gains made following the pandemic.
In the media conference, the Governor again pointed to the strategy that the Board has been following for the entire rate-hiking cycle: raising rates by a bit less than its peers did, in an effort to hold onto the gains in the labour market. The Governor also noted that some of the peer economies that are already cutting rates have had much more marked increases in unemployment.
The media statement acknowledged that growth in demand has been slow and that there are risks around consumer spending. This is part of the strategy to get demand and supply back into balance. There was, however, an interesting pivot to emphasise the spending measure including temporary residents rather than consumption of long-term residents as defined in the national accounts. The broader measure has grown more quickly, but this is largely because the corresponding population measure has as well.
Based on today’s statement and media conference, we do not see any reason to change our current view, that the RBA will remain on hold this year and start lowering the cash rate from February. There are uncertainties around this if events should turn out very differently than expected. Overall, though, we see the RBA Board as a bit more firmly on hold than last month.
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