The RBA is expected to leave the cash rate (4.35%) unchanged at today's meeting. This is to be the final policy meeting for 2023 and the last time the Board will meet at a monthly frequency - the RBA's practice for the past 3 decades - as it downshifts to an arrangement of 8 meetings per year from 2024 onwards, a key recommendation adopted out the recent review into the central bank.
Economic resilience and upside risks to the inflation outlook prompted the Board to resume its tightening cycle with a 25bps hike in November, ending a 4-month pause. Since then, the RBA's messaging has been widely interpreted as hawkish, though markets have detected a reluctance to hike again at this stage. That partly reflects a tweak in the Board's guidance from "Some further tightening of monetary policy may be required..." in October to "Whether further tightening of monetary policy is required..." coming out of the November meeting.
Recent labour market data have remained solid, though the unemployment rate stands at 3.7% as of October, up from cycle lows (3.4%) 12 months earlier. Wages growth has accelerated with a lag, rising to 4% year-ended (a high since 2009) following the largest quarterly increase on record in Q3 (1.3%) on adjustments to awards, broadly in line with RBA forecasts. Markets effectively priced out any chance of a follow-up hike last week when the monthly CPI indicator surprised on the downside: headline CPI slowed from 5.6% to 4.9%yr in October, with the core rate (5.3%yr) and services inflation (5%yr) also easing.
For a data-dependent Board, the fact that a couple of key data points are imminent, including the Q3 GDP outcome and the November labour market report adds to the case to hold. Pausing today will also afford the RBA time over its summer break to assess how the global disinflationary trends, which look to be accelerating in the US and Europe, are playing out and to consider the implications for Australia.
The disinflationary process in Australia is lagging developments offshore and with the current forecasts only pointing to inflation being at the top of the 2-3% target band by late 2025, the RBA will clearly want to retain the optionality to hike further. Markets acknowledge this but price the chance of a February hike only at around 33%. The key to that decision will likely be the December quarter CPI report due in late January.