The RBA steps out for its first meeting of the year today (decision due 2:30PM AEDT). The cash rate will remain unchanged at 4.35%, but this meeting is more about what the Board and then Governor Bullock in the post-meeting press conference communicates regarding future policy. Declining inflation and risks to the growth outlook have led markets to price in 2-3 rate cuts in 2024. The time has come for the RBA to remove its tightening bias, but expect it to remain cautious regarding the inflation outlook.
Today's Decision
Nothing other than an unchanged cash rate (4.35%) is expected today. The RBA last hiked rates in November before remaining on hold in December. Over the summer, easing cycles have continued to be priced into overseas markets as inflation readings cooled substantially into the end of 2023. A similar dynamic has emerged in Australia, with markets now pricing 2-3 RBA rate cuts this year. This is a material shift from the December meeting, from which the minutes noted "... expectations for policy rates in other countries had eased significantly... while being little changed for Australia".
The reappraisal of the rates outlook in Australia reflects declining inflation and headwinds to economic growth. Headline and core inflation slowed to 4.1% and 4.2% respectively in year-ended terms in the December quarter, printing below RBA forecasts for 4.5% on both measures. The Q3 National Accounts highlighted that household consumption has slowed notably under the weight of cost-of-living pressures and higher interest rates. The labour market remains robust but conditions have eased; the unemployment rate averaged 3.9% over Q4, up from a cycle low of 3.4% a year earlier.
Policy Guidance
The RBA started raising rates back in May 2022 and has maintained a tightening bias in varying forms ever since. Last week, the Federal Reserve and Bank of England (BoE) formally removed their tightening biases, and for a data-dependent RBA, the moment has arrived for it to make a similar shift. I think the BoE outlined a path the RBA may be able to emulate. Here, the BoE removed its reference to "further tightening" but reaffirmed that restrictive monetary policy was still required to return inflation to target and that its focus would now turn to "... how long Bank Rate should be maintained at its current level".
The importance of today should not be lost. Following the missteps of recent years, the RBA Review prompted the central bank to make efforts to improve its communications, including establishing a separate department to provide advice to the Board in this area. The new regime will want to make a good start, delivering clear and credible guidance. This necessitates removing a tightening bias that has exceeded its used-by date.
Economic Forecasts
For the first time, the RBA will publish its quarterly Statement on Monetary Policy alongside the rates decision - another effort to improve communication around policy decisions. Previously, the SoMP was released 3 days after the relevant meeting. The SoMP contains the RBA's economic and inflation forecasts, a key input for the Board in setting monetary policy. Three points stand out regarding the new set of forecasts:
- The inflation forecasts will need to be revised lower following the Q4 CPI report, though the RBA is likely to be cautious around the timeline for the return to the midpoint of the 2-3% target band, potentially not projected before end-2025.
- Risks to the growth outlook appear to be to the downside, with the RBA having underestimated the effects of cost-of-living pressures and higher interest rates on household consumption in the Q3 National Accounts. Rising income tax has also been another headwind to households. The changes to the Stage 3 tax cuts will definitely come up in the post-meeting press conference, but they aren't likely to have materially changed the RBA's outlook beyond what was already factored in.
- Conditions in the labour market and wages growth have broadly tracked in line with the RBA's earlier forecasts, pointing to minimal revisions.
