The RBA hiked rates by 25bps today to 3.85% on the Cash Rate (and 3.75% on the Exchange Settlement rate), a surprise move with markets close to fully priced for the Board to maintain a steady hand. Although inflation eased in the March quarter and the RBA's inflation outlook has not deteriorated, the tightening cycle in Australia has resumed after a fleeting pause in April.
In my preview of today's meeting, I outlined that the moderation in inflation in the March quarter was consistent with the RBA's forecast for a 2025 return to the 2-3% target band - a timeframe the Board had communicated it was prepared to tolerate to preserve the labour market - pointing to an extension of the April pause. This was also overwhelmingly the consensus view, but ultimately the Board determined more tightening was needed in order to return inflation to the target within a "reasonable timeframe". Speaking on today's decision at a post-meeting dinner in Perth, Governor Philip Lowe said that, as was the case at the previous meeting, deliberations around the Board table were finely balanced; in April it left rates steady but today it elected to hike.
In today's decision statement and then at his Board dinner speech, Governor Lowe noted that while inflation had passed its peak, a pick up in services sector inflation was a concern given similar price pressures overseas had proved to be sticky. It was also highlighted that with the recent data confirming the labour market remained very robust, wage and price-setting behaviour needed to be kept under close surveillance.
Despite these concerns relating to more persistent inflation trends, the decision statement revealed that the RBA's inflation outlook has not deteriorated. In fact, forecast inflation this year has actually been lowered, from 4.8% to 4.5%, and the expectation that inflation will then decline to 3% in mid-2025 was left unchanged.
Regarding economic growth, the outlook this year has been trimmed from 1.6% to 1.25% but revised higher further out the projections (from 1.7% to 2% through mid-2025). Domestically, the RBA remains uncertain on how consumer spending will hold up amid the various crosscurrents of rate hikes and cost-of-living pressures while also being supported by the labour market and savings accumulated over the pandemic. Developments from overseas (associated with the banking turmoil) also pose risks for growth in Australia.
In closing, the line from the Board is that it continues to aim for a soft landing, keeping the economy "on an even keel" while it returns inflation to the 2-3% target band. The Board retains a tightening bias, noting that "some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe" depending on how the data comes in relative to its outlook.
