The RBA Board returns from its summer break today where it is expected to resume its tightening cycle with another 25bps rate hike (decision due at 2:30pm AEDT). Revised economic forecasts should reaffirm the expectation for headline inflation to fall over the course of the year; however, there may be more caution around underlying inflation pressures and lead the Board to retain its guidance for further rate increases. This preview covers 3 keys to today's meeting.
1. The decision: rates to be hiked by 25bps...
Rates are widely expected to be hiked by 25bps to 3.35% (and 3.25% on bank reserves). Since October, the governor has remarked in his meeting statements that "inflation in Australia is too high" and that will be the basis of today's hike following the most recent CPI report. The minutes from the December meeting showed that the Board had all options on the table considering hikes of 25 or 50bps or going on pause. The "importance of acting consistently" led the Board to announce a 25bps hike and I assess the probability of it changing course today (in either direction) to be low.
2. The forecasts: inflation to fall as growth slows but risks remain...
The RBA has revised its economic forecasts for today's meeting, but they won't be made public until the quarterly Statement on Monetary Policy is published on Friday. However, Governor Lowe is likely to provide an overview of the outlook in today's statement. The forecasts probably won't change significantly but there may be some tweaks given the developments that have occured in the global economy over the RBA's summer break.
Firstly, global inflation pressures have shown more convincing signs of easing. Headline inflation rates in the US, Europe and the UK have declined as energy and goods prices have fallen. Secondly, China's accelerated exit from its Covid zero approach has improved prospects for global growth. Domestically, Australian inflation lifted broadly in line with RBA forecasts to 7.8%, though underlying inflation pressures at 6.9% were a bit higher than the Bank anticipated (6.5%).
For Australian inflation, it would not surprise if the RBA were to forecast a slightly faster decline in headline inflation in 2023 (4.7%) and 2024 (3.2%) given global trends. But as the Fed, ECB and BoE highlighted at their respective policy meetings last week, the RBA will likely say there is the risk of underlying inflation remaining more persistent than expected amid very strong labour market conditions and rising prices in the services sector.
The growth outlook will likely continue to forecast the domestic economy slowing well below trend this year (1.4%) and next (1.6%) but avoiding a recession, in part helped by the improved global backdrop. For reference, last week the IMF revised its growth forecasts for Australia to 1.6% in 2023 and 1.7% in 2024. The main uncertainty will continue to be around the outlook for household spending with the full effect of rate hikes yet to flow through. Robust labour market conditions are still likely to be expected throughout the year.
3. The outlook: RBA to remain hawkish for now...
Today's expected hike will likely be accompanied by the existing guidance that the Board "expects to increase interest rates further over the period ahead". Despite raising rates at every meeting going back to May last year, the RBA's message will be that there are still inflation risks it needs to guard against. Unless the Board wants to signal a change in its reaction function, it will leave the door open to a pivot by continuing to note that rates are "not on a pre-set course" and will depend on the data and its implications for the outlook. Given the growth outlook, the reference to the Board keeping the economy "on an even keel" as it lowers inflation remains appropriate.