The RBA Board has extened its pause on tightening to a second consecutive meeting, leaving the cash rate steady at 4.1% (and the Exchange Settlement rate at 4%) today. Recent economic and inflation trends - both in Australia and overseas - have afforded a data-dependent Board more time to take stock of developments. While the guidance that some additional tightening "may be required" was retained, the case for rates to remain at the prevailing setting is strengthening.
In my preview of today's meeting, I outlined the key factors from the July decision that indicated rates would be left on hold at this meeting. This included recognition of the significant extent of tightening already delivered and that the transmission of higher rates into the economy had yet to run its course. Governor Lowe's decision statement reaffirmed these themes, reaching the conclusion that it was again prudent to take additional time to assess conditions.
The key reflections made by Governor Lowe today were that the "recent data are consistent with inflation returning to the 2-3 per cent target range over the forecast horizon" and that the updated set of forecasts have retained the expectation that the Australian economy and employment can continue to expand alongside this. The decision to leave rates on hold will have been helped be the updated inflation outlook; by the end of the forecast horizon - a timeline relevant for monetary policy - inflation is projected to be "within the 2-3 per cent target range in late 2025". That is an improvement from the May forecast round, which had inflation declining but only reaching the top of the target range by the end of the projections in mid 2025. Notably, the Board hiked rates in May.
Overall, the tone of the statement was that a soft landing in Australia remains the RBA's base case, with confidence in that outlook undoubtedly enhanced by declining inflation and resilient economic conditions seen overseas. But that outlook is subject to considerable uncertainty, with Governor Lowe citing the lagged effects of monetary tightening, persistent services inflation, the response of wage- and price-setting behaviour in a slowing economy as key unknowns. In that sense, the Board seems likely to tread carefully from here, noting that additional tightening is contingent upon the incoming data and the "evolving assesment of risks".
