There was no follow-up increase to the cash rate (4.35%) from the RBA today after it elected to resume its tightening cycle last month. The Board will now assess developments over its summer break and has kept its options open to hike again if needed. But with significant easing cycles being priced into rates markets offshore in 2024, the window for the RBA to press on looks to be narrowing.
In today's statement, Governor Michele Bullock revisited the November decision explaining that the call to hike by 25bps and end its 4-month pause came as the Board assessed "the risk of inflation remaining higher for longer had risen". That refers to the upward revisions the RBA made to its inflation outlook last month, with both headline and core CPI falling more slowly to reach 3% - the top of the 2-3% target band - by the end of 2025 (up from 2.75% previously). But the governor said there was no need to hike today given that the incoming data since the last meeting had been "limited" and the updates it had received on the labour market and inflation had been in line with its expectations. While the Board has gone back into pause mode, the governor noted that higher rates were working to cool demand and that the full effects of the tightening cycle on the economy remained in the pipeline.
The Board has retained its guidance that "Whether further tightening of monetary policy is required..." will be determined by the incoming data. Pausing today leaves the RBA to watch the data over the summer months, which will shape how it responds upon its return in February. The RBA is maintaining the optionality to hike further, but the cash rate may well be at its peak already. Inflation offshore looks to be slowing at an accelerated pace, prompting markets to price aggressive rate cutting cycles in the US and Europe next year. Governor Bullock took a cautious view saying that trends in goods prices offshore had been "encouraging" but services inflation "remained persistent". Only time will tell which narrative prevails.