The RBA Board hiked its key rates by 25bps to 3.1% on the cash rate target and 3.0% for Exchange Settlement balances. Rates have risen by a cumulative 300bps since May, a rapid pace of tightening coming off the emergency settings in the pandemic when the cash rate floored at 0.1%. The tightening cycle in Australia may extend further into 2023, but a pause is coming nearer.
Today's decision statement from Governor Philip Lowe left a clear message as the Board heads for its summer break. The commitment to lowering inflation back to target remains firmly intact, leading to rates being hiked for the 8th month in succession and its tightening bias retained going into 2023. By continuing to tighten monetary policy, the Board is acting to guard against the risk of a "prices-wages spiral" where high inflation feeds through to influence wage settings. The RBA continues to see further upside in inflation (to a peak of 8%), while the governor noted the recent strength in labour market outcomes, including a new historic low of 3.4% for the unemployment rate and rising wages growth.
However, balancing those developments, the governor also pointed out that growth is forecast to slow to 1.5% in 2023 and 2024, a pace well below trend in Australia. But the risks look to be tilted to the downside given the governor highlighted there had been a "substantial cumulative increase" in rates and the full effect of monetary tightening had not yet been transmitted through the economy. The RBA remains sensitive to the risk of overtightening, repeating the line that it is aiming to keep the economy "on an even keel" as it hikes rates to return inflation to target.
In looking ahead, the Board's guidance was retained that it "...expects to increase interest rates further over the period ahead" but the qualifier of policy not being "on a pre-set course" was returned to the statement. A similar qualifier has already been used in this tightening cycle preceding the downshift from 50bps to 25bps rate hikes. Given the next quarterly CPI data will print ahead of the RBA's return in early February, a further rise in inflation may see the Board hiking rates further; however, that might be about it for the tightening cycle.
What the RBA would likely need to see for it to pause is the inflation outlook in February's forecasts coming back into the 2-3% target range by the end of the projection period. Currently, inflation is seen above 3% through 2024, but if the data over the summer is consistent with weaker growth dynamics globally and domestically, and if there are more convincing signs inflation is turning lower, that could be enough to lower the RBA's inflation outlook sufficiently to generate a policy pivot.
