The RBA resumed its tightening cycle at today's meeting hiking the cash rate by 25bps to 4.35% (and the Exchange Settlement rate to 4.25%). Rates had been left unchanged at 4.1% since June, but with the recent data and updated forecasts indicating the risks to the inflation outlook had increased, the Board was compelled to move. However, a tweak in the Board's policy guidance hints at a reluctant to hike further unless it has to.
This was the second time in this cycle that the RBA has hiked after a pause, as it did back in May. In today's statement, Governor Michele Bullock framed this rate hike in terms of increasing assurance around returning inflation to the 2-3% target band "within a reasonable timeframe", repeating a similar justification to that which accompanied the May rate hike. While the Board had been content to maintain a steady hand over recent months, today the governor said that the inflation data had been stronger than previously expected in the August forecasts while economic activity and the labour market had been more resilient. Housing prices had also risen further, bolstering household wealth.
Reflecting these developments, the RBA's updated forecasts (to be published in full in Friday's quarterly statement) have revised up the outlook for inflation modestly in 2024 (3.25% to 3.5%) and 2025 (2.75% to 3%) and lowered the profile for the unemployment rate to a peak of 4.25% (from 4.5% previously). The outlook for wages growth is unclear based on today's statement, but the view was that the current pace remained consistent with the inflation target (assuming productivity growth rebounds).
The key consideration moving forward for the Board is balancing the effects of the tightening in the pipeline (which was added to today) amid significant uncertainty over the outlook for growth and inflation. In this situation, the Board remains data dependent, but a subtle tweak was made to its guidance on rates. Whereas previously the Board communicated that "Some further tightening of monetary policy may be required..." it has shifted to "Whether further tightening of monetary policy is required...", seemingly conveying more caution around taking the cash rate higher.
