The RBA Board hiked rates for the 9th successive meeting raising its key rates by 25bps to 3.35% on the cash rate target and 3.25% for Exchange Settlements. A hawkish tilt appears to have been made by the Board despite the outlook for the domestic economy having essentially not changed over the summer.
If the market reaction is anything to go by, today's decision statement from Governor Lowe has signalled a hawkish turn from the RBA on fighting inflation. The key was a tweak to the Board's forward guidance on rates. In December, the statement noted: "The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course". But in today's statement, a stronger tone was used: "The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary". Markets responded by raising pricing for the terminal rate to now be pressing 4% from around 3.6% pre-meeting. Meanwhile, the 3-year and 5-year bond yields surged to close the session 15bps higher at 3.24% and 3.35% respectively.
From my perspective, while I don't think the key message in the forward guidance has changed all that significantly, it does appear the RBA now tilts a bit more in the hawkish direction. This is despite the RBA appearing to make no changes to either its inflation outlook (4.75% this year and around 3% in mid-2025) or its growth forecasts (1.5% this year and next). Besides this point, there are some rather confusing observations in the statement.
Firstly, it notes that strong domestic demand is "adding to inflationary pressures" but then goes on to say that the post-pandemic rebound in services has "largely run its course" and that the effect of tighter financial conditions will "constrain spending more broadly". Meanwhile, it continues to note the Board recognises the full effects of the cumulative increase in rate is yet to work through to mortgage payments. Already it observes that households with lower savings buffers are being squeezed by rate hikes and cost-of-living pressures, while household balance sheets are, on aggregate, now worse off due to the falls in housing prices.
Secondly, global inflation is acknowledged as "moderating" due to falls in energy prices, the resolution of supply chain pressures and rising interest rates, but as highlighted above this has not lowered the trajectory for Australian inflation. Arguably, a stronger adjective could have been used than "moderating". Since the previous forecasts were produced, inflation has come down across the US (7.8% to 6.4%), euro zone (10.6% to 9.2%) and the UK (11.1% to 10.5%) to name a few examples. Referring to the US, Fed Chairman Powell said last week that there is a "disinflationary process now getting underway".
Thirdly, the line that medium-term inflation expectations "remain well anchored" has been retained but it then goes on to speak about the importance of avoiding a "prices-wages spiral" and the risk of high inflation becoming "entrenched in people's expectations".
The statement did continue to stress the large degree of uncertainty around the outlook and the range of scenarios that could unfold for the Australian economy. Governor Lowe continued to state that the Board is attempting to keep the economy "on an even keel", but the "path to achieving a soft landing remains a narrow one". Greater detail on the RBA's thinking should come to hand in Friday's quarterly Statement on Monetary Policy.
