The RBA is set to extend its tightening pause today, leaving the cash rate on hold at 4.1% for the third meeting in succession (decision due 2:30pm AEST). This is Governor Philip Lowe's final meeting of his 7-year tenure leading the RBA and will be followed by a speech titled Some closing remarks on Thursday (1:05pm AEST).
After leaving rates on hold at the July and August meetings, the Board will very likely maintain that position today. Amid economic headwinds offshore and signs that the effects of its tightening cycle are in transmission through slower domestic growth and declining inflation, a data-dependent Board has been content to stay on the sidelines and monitor developments.
Forecasts updated by the RBA last month showed the central scenario is for the economy to remain on the "narrow path" where inflation falls back to the 2-3% target band over the next couple of years, with growth and employment still increasing. A hint that the Board is thinking along the lines of an extended pause was evident in the August meeting minutes, which noted that there was "a credible path back to the inflation target with the cash rate staying at its present level". However, the Board ultimately retained its tightening bias that "some further tightening of monetary policy may be required...", contingent upon "... the data and the evolving assessment of risks".
The incoming data since the August meeting looks to support the continuation of the RBA's pause. The most notable developments have been softening wage and price data. In the June quarter, the Wage Price Index eased back to a 3.6% annual pace, printing on the soft side of RBA expectations for an unchanged 3.7%. Last week, 12-month headline inflation was reported to have declined from 5.4% to 4.9% in July. Labour market conditions also softened in July as the unemployment rate ticked up from 3.5% to 3.7% on the back of employment falling by 14.6k in the month.
All in all, the cash rate appears set to remain at 4.1%, with the data continuing to allow the Board time to observe the effects of its tightening cycle on the economy and inflation. While cracks may be starting to emerge in the Board's tightening bias, this seems likely to remain in place at this juncture, on the eve of the handover to the new Governor, the current deputy Michele Bullock.
