The Reserve Bank (RBA) has left the cash rate unchanged at 4.35 per cent but maintained its hawkish tone, acknowledging that further rate hikes are possible.
The bank, which for the first time delivered its decision outside of the “first Tuesday of the month” schedule, did not surprise economists, with most predicting the bank would hold despite worrying signs from the US regarding the ongoing inflation threat.
The RBA’s last increase – a 25 basis point hike in November – came after an upside surprise in the September quarter CPI. However, since then, data from the Australian Bureau of Statistics has revealed a considerable CPI slowdown, with inflation rising 3.4 per cent in the 12 months to January, representing the lowest annual inflation since November 2021.
But much like last month, while the central bank announced a hold, it did not indicate that easing is in sight.
Namely, the RBA said: “While recent data indicate that inflation is easing, it remains high.”
“The board expects that it will be some time yet before inflation is sustainably in the target range. The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out.”
Ahead of Tuesday’s rate announcement, Scott Solomon, co-portfolio manager of the T. Rowe Price Dynamic Global Bond Strategy at T. Rowe Price, said that while recent data has been disappointing, “there are no signs of immediate trouble”.
“Therefore, we expect the RBA to bide its time and wait for a full slate of Q1 data, which will be available for their May meeting. Given that the Fed is not likely to begin its hiking cycle before June, there’s little need for urgency for the RBA”.
Last week, HSBC’s Paul Bloxham assessed that the RBA is more likely to focus on the necessity of further monetary tightening rather than considering potential rate cuts.
“We expect the RBA to remain on hold in March and the board discussion to be about whether another hike is needed, rather than about any prospect of rate cuts,” the chief economist said.
“Forthcoming personal income tax cuts from 1 July and the risk of more fiscal spending in the May budget, perhaps primed by an election that is due before mid-2025, bolster the case for the RBA to remain on hold.”
AMP’s chief economist, Shane Oliver, slightly changed his tone last week. The economist who was earlier predicting rate cuts to kick off in June, said that there’s a high-risk they could be delayed until August.
“Significant fiscal stimulus in the May budget could risk delaying the start of easing but the RBA will probably want to see whether this eventuates or not before starting to cut – which likely rules out a May cut.”
Earlier this month, GSFM’s Stephen Miller outlined the challenging “last mile” on the path to disinflation but predicted an easing process will commence around mid-year, with the European Central Bank expected to be the first cab off the rank in June or July, followed by the Fed in late July, and the RBA in early August.
Post-meeting conference
While the bank held rates on Tuesday, economists rejoiced in a perceived “dovish” tone from the bank.
Addressing the media post the board meeting, governor Michele Bullock dispelled optimism, downplaying the wording in the board’s statement.
Namely, while the board said it is “not ruling anything in or out”, these words were perceived by some to indicate the board’s “verbal pivot” towards neutral especially since they replaced its previous phrase – “a further increase in interest rates cannot be ruled out”.
But Bullock brushed off indications of a pivot, saying instead that the RBA was responding to “some data”, which has demonstrated that “we are still on the path we thought we were on”.
“What the board is basically saying is we’re uncertain, we don’t know, we can’t rule in or out either,” Bullock said, indicating that the updated language simply better reflects the board’s thoughts.
“We still believe we’re firmly on the narrow path,” she noted.
Regarding the possibility that the bank could entertain rate cuts later this year, the governor said the board would need more “confidence” that inflation is “coming back into the band”.
Only when the bank feels it is “overachieving” on the inflation front, can it debate a cut, Bullock said, adding that, at the moment, “we’re not seeing that”.
“We’re in a position where we are cautious, we want to wait and see. As I said, [there are] risks on both sides,” she said.
Bullock also evaluated that the November rate hike was appropriate, despite suggestions from economists that it could have been a tad oversensitive.
Commenting on whether a hike was on the table on Tuesday, the governor said the board considered “what was best”.
“Obviously, the board considers a range of possibilities and the possibility of a rate rise is something that the board might consider in terms of whether we’re at the right spot.”
Despite the governor’s hawkishness, markets are pricing in rate cuts from September this year.
