The RBA's tightening cycle continued at today's meeting, with a 25bps rate hike taking the main policy rate to 3.6% and the exchange settlement rate to 3.5%. After turning more hawkish in February, today's statement from Governor Philip Lowe softened that narrative to be more in line with the Board's messaging at end of 2022, indicating a pause could be nearing. Pricing for the peak cash rate has fallen back to 4% from around 4.2% pre-meeting.
Today's statement signalled a shift back to data dependency from the RBA to guide "when and how much further interest rates need to increase". That is a notable change from February when the reference to rates not being "on a pre-set course" was removed from the meeting statement as the Board communicated "further increases in interest rates will be needed over the months ahead".
In my preview of today's meeting, I suggested that with the incoming data on wages and hourly labour costs coming in below the RBA's forecasts, there was scope for the Governor to soften the tone around the risks of a wage-price spiral emerging. Indeed, this is what played out as the Governor noted: "wages growth is still consistent with the inflation target and recent data suggest a lower risk of a cycle in which prices and wages chase one another". In my view, this was the key change from the February statement and frames the tightening cycle in a less hawkish context. While the RBA remains on guard that wage pressures could yet accelerate given the labour market "remains very tight", the Governor also observed that conditions recently had "eased a little".
On inflation, as outlined in the preview, the Board appears to have taken the decline in the 12-month CPI to 7.4% in January as a sign consistent with its forecast for inflation having peaked in Q4. Whereas in February, the Governor said that "strong domestic demand is adding to inflationary pressures" the assessment was more nuanced this time around. Goods inflation is expected to moderate reflecting global trends and softer demand, but services inflation is high on the back of the post-pandemic rebound in services spending and rising rents.
Referring to last week's national accounts, the Governor noted the growth slowdown into year-end as consistent with household consumption easing in response to rising rates. Below-trend growth is expected in 2023 and 2024, with a softer outlook for housing construction also a contributing factor.
All in all, the RBA's hawkish tone from February has softened as the risks of a wage-price spiral have eased and economic growth slowed with rising rates impacting household spending. But the guidance that the Board expects "further tightening of monetary policy" to be required is consistent with another rate hike in April. The shift to a more data-dependent focus potentially opens the door to a pause in May, contingent on the Q1 CPI report confirming Q4-22 as the peak in inflation.
