The RBA held the cash rate unchanged at 4.35% at its first meeting for 2024 today. A tweak was made to the Board's guidance softening its tightening bias, though it maintains that "a further increase in interest rates cannot be ruled out". This is despite new forecasts showing an outlook for slower growth and lower inflation. The declines in Australia's headline (4.1%) and core (4.2%) inflation rates were welcomed by the RBA, but the message from Governor Bullock was that this progress needs to continue and that rate cuts are not on its mind. Markets remain priced for the RBA to deliver 2-3 rate cuts this year.
Overall, the tone of today's meeting, the Statement on Monetary Policy, and the press conference could be summarised as cautious. I had been of the view that the RBA would remove its tightening bias, but the Board was not ready to make that shift yet. The new line: "The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out" allows the Board to retain optionality; it could hike again, but it does not dismiss that rates may have peaked either - the more likely scenario.
The key judgment from the Board is that there remains excess demand in the economy, pointing to a tight labour market and elevated services inflation. Given this, the Board remains highly alert to inflationary risks. The statement noted that higher interest rates were continuing to rebalance supply and demand, essentially highlighting that it believes the labour market needs to soften further to sustainably deliver inflation within the target band.
The updated set of forecasts published by the RBA contained few surprises, though it is worth noting that one of the conditioning assumptions is for around 4-5 rate cuts between mid-2024 to mid-2026, based on market pricing and economist surveys. The growth outlook was downgraded for 2024 (2% to 1.8%) and 2025 (2.4% to 2.3%), resulting in a slightly higher peak in the unemployment rate by mid-2025 (4.4% from 4.3%). Following the Q4 CPI report, the inflation outlook has been lowered over the next couple of years; however, both the headline and core rates aren't seen returning to the midpoint of the target band until mid-2026. The next RBA meeting is set for 18-19 March.
