The RBA hiked its key rates by 25bps again following its downshift from a sequence of frontloaded 50bps hikes last month. The cash rate target is now at 2.85% and the Exchange Settlement rate (remuneration on bank deposits) moved up to 2.75%. Although the Board continues to expect further rate hikes will be required "over the period ahead", revised forecasts that project a higher peak in inflation and a lower growth outlook means the tone is turning more cautious with the RBA looking to find the right balance in the trade-off between growth and inflation that keeps the economy "on an even keel".
In Governor Philip Lowe's decision statement, it was noted that rates had risen "materially" over the course of the tightening cycle. Rates have now risen by 275bps since May and the emphasis remained on the lags associated with the transmission of monetary policy, with the cumulative effect of the rate hikes yet to impact mortgage payments and household spending.
In his remarks at the Board dinner, Governor Lowe made the key observation that it is now the level of rates rather than the size of the hike that is the more important consideration. Now that rates had moved "back to more normal levels", it is the Board's judgment that it is appropriate to hike at a slower (or more conventional) pace. Lowe later kept the option of larger hikes on the table, but a return to frontloaded hikes looks an unlikely scenario from here. Market pricing for the terminal rate has been scaled back to below 4% following today's decision.
That is despite the RBA now expecting inflation to reach a higher peak of around 8% in Q4 (up from 7¾%) following last week's stronger-than-expected CPI report. Due to that revision, inflation is also expected to be higher in 2023, slowing to 4¾% from 4.3% previously. By the end of 2024, inflation is still expected to be above the top of the 2-3% target band at "a little above" 3% compared to 3% in the August forecasts.
Forecast growth this year has been revised down from 3.2% to 3.0% ahead of a material slowdown to 1.5% in 2023 (from 1.8%) and 2024 (from 1.7%). Slower growth is projected due to a weaker global economy, the post-pandemic recovery in services fading and as higher rates impact household spending in Australia. Although the RBA sees the unemployment rate drifting up slightly as growth slows, the expectation for unemployment at 4% in 2024 is little changed.
In general, the RBA is forecasting the labour market to remain strong over the next couple of years, in effect reflecting its base case for a soft landing for the Australian economy amid an aggressive tightening cycle to bring down inflation from a 30-year high. The Board continues to assess this path to be a "narrow one" and "clouded in uncertainty". Full details of the RBA's updated outlook will be available in Friday's quarterly Statement on Monetary Policy.
