Although today's meeting will be the first overseen by the incoming governor Michele Bullock, the RBA Board is very likely to again leave the cash rate on hold at 4.1% (decision due at 2:30pm AEDT). Declining inflation and slowing growth have shown the Board that tighter monetary policy is working and with the full effects from the hiking cycle still in the pipeline, it has held rates steady at its recent meetings. The Board is expected to retain the guidance that "some further tightening of monetary policy may be required..." with inflation not forecast to return to the 2-3% target band until 2025.
For a data-dependent RBA Board, any further rate hikes will need to clear a high bar. With a substantial 400bps of accumulated tightening delivered since May last year, the onus has been put squarely on the incoming data and related developments to prove that a cash rate setting of 4.1% is not appropriately restrictive. Since the September meeting, the incoming data looks to have been broadly consistent with the RBA's existing assessments.
While untimely, the rise in headline inflation from 4.9% to 5.2% in August on the back of higher petrol prices does not seem a material development. The September meeting minutes effectively showed that the Board was expecting this to occur and that it indicated that "the process of returning inflation to target could be uneven". Speaking to this point, while headline inflation moved back up in August, CPI excluding volatile items (petrol, fruit and vegetables) declined from 5.6% to 5.3%. More broadly, a disinflationary process is continuing to play out, making the RBA's forecast for 4% inflation by the end of the year still plausible.
The June quarter national accounts - released the day after the previous RBA meeting - reaffirmed that households are pulling back in response to cost of living pressures and rising interest rates, driving a slowdown in growth in Australia. A 0.4% expansion in Q2 GDP saw growth through the first half of the year come in at a subdued 0.7%, down from 1.3% in the back half of 2022. Against this backdrop, the labour market has eased from peak tightness; however, conditions are still robust, underscored by a rebound in employment (64.9k) holding the unemployment rate at a historically low 3.7% in August alongside record-high labour force participation (67%).
One aspect of the labour market that remains under close watch is wages growth. Some of the upward pressure on wages growth has been reduced due to the easing in the labour market. But with the June quarter national accounts reaffirming weakness in productivity, unit labour costs remained elevated, presenting upside risks to the inflation outlook.
