The RBA Board is likely to raise its cash rate by 25bps to 4.35% at today's meeting. Rates have been left on hold at each of the past 4 meetings, but the RBA has sounded more hawkish lately and with inflation not declining as fast as expected, the Board appears set to act upon its tightening bias.
Earlier in this cycle, the RBA hiked rates after pausing and this may repeat at today's meeting. After holding rates unchanged in April, the Board returned to hiking in May (and then again in June) following inflation data for Q1. The cash rate has subsequently been on hold at 4.1%, but the Board has maintained that "some further tightening of monetary policy may be required", depending on the incoming data.
Essentially, the key issue the Board will consider is whether it has tightened monetary policy sufficiently in light of recent data, with new forecasts for the economy and inflation (to be published in Friday's quarterly statement) to also factor into its decision. At the October meeting, it was communicated that the Board had a "low tolerance" for inflation taking longer to return to target than the late 2025 timeframe it currently expects.
Since then, headline inflation in Q3 printed at 5.4% and 5.2% for the core (or trimmed mean) rate; while these outcomes were down from 6% and 5.9% respectively in Q2, inflation doesn't look to be falling as quickly as the RBA's forecasts for end 2024 (4.25% headline and 4% core) imply. Additionally, despite some cooling in conditions, the activity and labour market data have remained resilient, indicating the Board will be able to construct a broad case for a rate hike.
At the May meeting, the Board cited its commitment to returning inflation to target "within a reasonable timeframe" as warranting a tightening response. If the Board does hike today, a similar justification may again be called upon, particularly if the near-term inflation outlook is revised upwards. However, I am doubtful that the timing for the eventual return to the 2-3% target band will be pushed back from late 2025. In a similar manner to the Fed, ECB and BoE, the RBA in today's statement could emphasise that maintaining rates around current levels will be needed to return inflation to target.
