The RBA Board is set to hold its key policy rate at 4.35% at today's meeting (2:30pm AEDT). With recent data coming in broadly in line with RBA forecasts, the focus will be on the tone of the Board's statement and the messages from Governor Bullock in the post-meeting press conference. The Board is holding onto a tightening bias, but inflationary risks are receding with the economy slowing sharply and the labour market easing.
Today's meeting shapes another case of steady as it goes for the Board. Key data outcomes have been in broad alignment with RBA forecasts and commentary from officials at the central bank has been scarce in recent weeks. The key message from the Board at the February meeting was that it was not yet confident that inflation was heading back to target on a sustainable basis, meaning that it could not rule out "a further increase in interest rates". That contrasts with market pricing that is pushing towards discounting two RBA rate cuts in the back half of the year, while many of its central bank peers overseas have moved on from signalling the peak for rates in the cycle and are discussing the timeline for policy easing.
Key judgments the RBA has made look unlikely to change in light of recent data. Disinflationary trends appeared to remain intact in early 2024 as the headline CPI held at 3.4%yr; however, the January report contained limited updates on services prices, the component of the CPI basket the RBA is watching the closest. Another point the RBA has been strong on is that inflation remains elevated due to demand conditions exceeding the capacity of the economy to supply goods and services. Although I have reservations about that assessment, the RBA has said that this imbalance it has seen is easing as the economy slows. I think this is how the Board will frame its interpretation of what was a weak GDP outcome of 0.2% in Q4 and 1.5% in year-ended terms.
The Board's analysis of the labour market will also be important. Tightness in the labour market clearly eased over the course of 2023 - the 3-month average for the unemployment rate ended the year at 3.9% compared to 3.5% in December 2022 - and wages growth looked to be peaking at just above 4% in the Q4 update received late last month. For the moment, the Board's priorities are on the inflation side of its mandate, but the risks to the employment side look to be increasing. A policy pivot that removes the possibility of further tightening and opens the dialogue to rate cuts probably requires more attention to shift to the risks to the labor market outlook.