The RBA left the cash rate unchanged at 4.10% today (ES rate 4.0%). With the economy and inflation tracking broadly in line with the forecasts published just a little over a month ago, back-to-back cuts were never in contention. A rate cut is nearly 80% priced at the next meeting on May 20, but with underlying inflation still above the 2-3% target range and the labour market remaining robust, Governor Bullock again pushed back on market pricing for an easing cycle that discounts the cash rate to around 3.5% by year-end.
Today's statement from the Board maintained the same key themes as in February: underlying inflation is moderating; the outlook remains uncertain; and sustainably returning inflation to target is the priority. Increased confidence that underlying inflation is returning to the 2-3% target opened the door to the cut in February and that progress has since been validated as the trimmed mean eased to 2.7% in the monthly CPI series. However, the Board is understandably cautious on the eve of the Trump administration announcing a swathe of trade tariffs.
In the post-meeting press conference, Governor Bullock said the RBA had been working through a range of scenarios to map out the likely impacts on Australia from a global trade war. In that event, growth was expected to be weaker but the effects on inflation were not clear. A new line was added into today's statement that noted 'monetary policy is well placed to respond to international developments if they were to have material implications for Australian activity and inflation'.
Aside from the uncertainties offshore, domestically the RBA has question marks over how the labour market will evolve and the recovery in household consumption as cost-of-living pressures subside. Last week's federal budget included measures to ease those pressures and, while they were largely an extension of existing policies (energy bill rebates and tax relief), Governor Bullock saying that the Board considered those measures to be 'a wash' as they had largely been factored into the February forecasts should have raised a few eyebrows. The continuation of the energy bill rebates for an additional 6 months for example will have what the RBA would call 'mechanical effects' on inflation - holding it lower for longer before rising later on - and this cannot have been incorporated into the forecasts since the policy was only announced last week.
The closing paragraphs reaffirmed the Board is taking a data-dependent approach to policy given the uncertainty around the outlook. In practice, this means the data that will come to hand over the coming weeks - wage and inflation updates for Q1 and additional labour market reports in particular - will be key to seeing the rate cut that is largely priced in for May delivered.