The RBA Board meets today (decision due at 2:30pm AEST) following its decision in April to pause rate hikes in Australia. That left the cash rate at 3.6%, up from the pandemic low of 0.1% since May last year. Last week's Q1 CPI data confirmed inflation is moderating after peaking in late 2022, validating the April decision and giving the green light to the Board to extend its pause. Late this evening (9:20 PM AEST), Governor Lowe will speak about the decision at a post-meeting dinner in Perth.
A recap...
The cash rate was paused at 3.6% in April as the Board elected to take stock of developments. Rates had been hiked at every meeting since May last year, rising by 350bps over that stretch. Assessing that the cash rate was already at a restrictive setting and with the full effects of the earlier hikes still to come, the Board paused its tightening cycle awaiting more information. In shifting to a more data-dependent approach, the Board's forward guidance for further tightening was softened to "may well be needed" from a firmer line of "will be needed" in March.
Updated forecasts to support an extended pause...
A key part of the information the Board is waiting on are the updated economic forecasts prepared by RBA staff for today's meeting. While those forecasts won't be released until the Statement on Monetary Policy is published on Friday, the overall tone of the outlook should be reflected in the decision statement and then in Governor Lowe's speech.
The focus for the Board will be on the outlook for wages growth and inflation. After the Wage Price Index in Q4 (3.3%) came in soft relative to the RBA's expectation (3.5%), the peak for wages growth that was projected in February of 4.2% by year-end could be revised lower.
On inflation, the February forecasts mapped out a return to the 2-3% target band in the first half of 2025. The April meeting minutes indicated this was at the limit of, but still within, the timeline the Board was prepared to tolerate given the medium-term horizon of its mandate.
After inflation moderated in Q1 on both a headline (7.8% to 7%) and core (6.9% to 6.6%) basis, the outlook from February is likely to have at least held. Potentially, there could be some scope to forecast a slightly earlier return to 2-3% inflation if the wages growth outlook is lowered.
The expectation for economic growth to slow to a well below trend pace of 1.6% this year and next is likely to remain little changed, with the risks to that outlook broadly balanced. Domestically, the major uncertainty remains around household consumption and this will take some time to resolve.
A strong labour market, accumulated savings and rapid post-pandemic population growth could support demand by more than expected; conversely, rate hikes are yet to fully take hold with many fixed-rate mortgages moving to much higher variable rates this year and cost-of-living pressures are weighing on spending.
Offshore, the major development to be factored into the growth outlook is the effect of the banking stresses in the US and Europe. Weaker global growth would have spillover effects on Australia.
... leaving rates on hold in May
I anticipate the Board will leave rates on hold today. The Board has taken a strategic view that it can aim for a gradual return of inflation to the target band in order to preserve the employment side of its mandate. Inflation has clearly peaked and is moderating in line with the RBA's outlook. The labour market remains strong, but as Governor Lowe has highlighted, the current pace of wages growth is not a constraint on returning inflation to target. An extended pause looks likely.
