The RBA Board is once again set to consider either leaving the cash rate on hold (4.1%) or hiking rates by 25bps at today's meeting (decision due at 2:30pm AEST). Shaping as another finely balanced decision, I side with the Board leaving rates on hold, extending the pause from the July meeting. This preview covers 3 key aspects of today's meeting.
The decision
As has been the case since April, the discussion around the Board table will be on the relative merits of either holding rates unchanged or hiking by 25bps. The Board has landed on both sides of the argument over recent months - it held in April only to then hike in May and June before coming back to a hold in July - making it difficult to predict the outcome of today's meeting.
There were, however, signs in the July decision that the Board may be prepared to extend its pause. The meeting minutes outlined that the members agreed there had already been a significant tightening in monetary policy (400bps) - with the full effects yet to flow through to the economy - and that the cash rate was "clearly restrictive" at the prevailing level.
There was also recognition that slowing growth and inflation presented downside risks to its economic outlook. CPI data out last week reported Australian inflation fell from 7% to 6% (year-ended, headline terms) in the June quarter, with the core rate also easing from 6.6% to 5.9%; these outcomes were softer than the RBA had anticipated in its previous forecast round in May. This - together with a sharp fall in retail sales in June (-0.8%) - may be enough to see the Board on hold today. In the alternative case, the Board may look at strong labour market conditions and elevated services inflation and judge that a hike is warranted after last month's hold.
The outlook
RBA staff will present an updated set of economic forecasts for the Board to factor into today's decision. While these forecasts won't be made public until the Statement on Monetary Policy is published on Friday, Governor Lowe's decision statement will likely provide an overview of the revised outlook. The key theme of the RBA being able to steer the economy on the "narrow path" Governor Lowe speaks about (avoiding a downturn) is likely to be maintained in the August outlook, implying the Board does not want to overtighten monetary policy.
Much interest will be on the updated inflation outlook. In May, the RBA forecast it would take until mid-2025 for inflation to come back to the top of the 2-3% target band. On the back of last week's CPI report, the questions to be answered are whether inflation is seen coming back to the target band sooner (potentially late 2024) or if mid-2025 remains the timeframe, will it now forecast inflation to be closer to the midpoint (2.5%) of the target band by then. Either of these scenarios would help the Board explain a decision to leave rates on hold, if it chooses to go that way.
The guidance
Since May, the Board has been in a data-dependent mode, keeping its policy options open as it assesses economic conditions. The Board's guidance has been that "some further tightening of monetary policy may be required..." in order to return inflation to the target band "...within a reasonable timeframe" conditional upon "...how the economy and inflation evolve". Given the Board will receive updated forecasts, this guidance could be tweaked; however, the central message that further tightening remains possible seems likely to be kept intact.