RBA remains on hold, slowly gaining confidence
The RBA remains on hold with the cash rate kept at 4.35%. But the Board is gaining confidence in its own forecasts that inflation is coming down.
As expected, the RBA Board held the cash rate steady at 4.35% following its meeting this week. The Board remains concerned that underlying inflation remains above target, with the key trimmed mean measure at 3.5% over the year to the September quarter. It infers from this level of inflation that aggregate demand continues to outstrip aggregate supply. The Board is therefore resolved to keep monetary policy restrictive until it is clear inflation is returning to target on the desired timetable.
It still expects that it will be ‘some time yet’ before inflation returns sustainably to the 2–3% target and approaches the midpoint of 2½%. However, it has changed its language and is no longer saying that it is ‘not ruling anything in or out’, as it had in every statement since March. The word ‘vigilant’ has also been cut from the post-meeting statement. Rather, the Board is ‘gaining some confidence that inflationary pressures are declining in line with these recent forecasts’. In other words, we are getting closer to the point that the RBA will be comfortable cutting rates. And in a shift in view that will surprise almost nobody, it no longer feels the need to flag the possibility of a rate hike. The post-meeting statement highlighted that ‘some of the upside risks to inflation appear to have eased’.
Indeed, some of the Governor’s answers in the post-meeting media conference opened the door to a more dovish view than we have seen from the Bank recently, including in her most recent speech. That said, her opening statement and answers today continued to emphasise the RBA’s assessment that aggregate demand exceeds aggregate supply and the current level of (trimmed mean) inflation is the best indicator of where that balance lies.
The Board assesses that monetary policy is ‘working as expected’ in bringing demand and supply into alignment, with the gap between the two continuing to close. Although there was still a nod to weak productivity growth, the post-meeting statement also highlighted the downside risks to household consumption and thus overall growth and the labour market.
Since the last Board meeting, Wage Price Index (WPI) and national accounts data have been released. The WPI data was noticeably softer than would be required to meet the RBA’s November forecast for growth over 2024, as we noted at the time. Similarly, although the RBA did flag that it expected consumption to be flat in the September quarter, GDP overall was softer than consensus and, we suspect, the RBA’s own expectations. (The RBA only publishes forecasts for June and December quarters, not the intervening March and September quarters.) A Q4 bounce large enough to match the RBA’s forecasts for 2024 growth is unlikely to eventuate for either series. Further downgrades to the RBA’s near-term forecasts can therefore be expected in the February round.
In today’s statement, the Board acknowledged that wage pressures had eased more than it previously expected. During the media conference, the Governor initially sought to characterise the data flow as showing the ‘real-side’ data (output, consumption) as soft but the nominal side – inflation – as still too high. It was only after some further questioning that the downside surprise on wages growth – an important nominal variable – got a mention.
Similar to earlier RBA communications, the Board statement pointed to the apparent stabilisation in the unemployment rate and some other measures of labour market tightness as signs that the labour market was still in a state of more than full employment. Indeed, the language of the paragraph on the labour market was only minimally changed from last month, bar some minor factual updates and a decision not to start a sentence with ‘But’.
The concentration of recent employment growth in the non-market sector did not rate a mention in the post-meeting statement. In the media conference, however, the Governor was asked about the risk that employment growth in the non-market sector slows. So far, the RBA seems content to rely on other sectors bouncing back in time, along with household consumption. We hope it is right, but we are not confident that handover will happen quickly enough.
Overall, the tone of today’s communication was less hawkish than the November round, appropriately so given the data flow since then. The ‘more than one good quarter’ language from the November minutes has again been clarified to indicate that other data matter, too, rather than the meaning some observers took (‘at least two quarters of good CPI data from here’). As we noted at the time, even if that was the right interpretation, things can pivot quickly if the data flow demands it.
We have recently revised our view of the likely path of the cash rate to a base case of a first cut in May. As we said at the time, though, we cannot entirely rule out an earlier start date of 18 February or 1 April should outcomes continue to undershoot the RBA’s expectations, especially for trimmed mean inflation. Today’s change of language represents a welcome acknowledgement that disinflation remains on track and that we are getting closer to the point that some of the current policy restrictiveness can be withdrawn. And in the media conference, the Governor conceded that there were scenarios in which the Board ended up cutting in February, while prudently choosing not to describe one.
In acknowledging that reality, the RBA has clearly tilted the probabilities back towards an earlier start date for the rate-cutting phase than where it stood a few weeks ago. It does not, however, shift that balance of probabilities enough to change our base case to be earlier than May just yet. The RBA still assess aggregate demand as exceeding aggregate supply. While ever it continues to believe this, it will be cautious about embarking on rate cuts. Any shifts back towards an earlier timetable depend on the data flow from here, especially on the labour market and trimmed mean inflation.
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