The RBA maintained its key rates at current levels (cash rate 4.35% and Exchange Settlement rate 4.25%), extending its pause for a third meeting in succession. A cautious RBA said that it is 'not ruling anything in or out' from a policy perspective, but the decision to remove the reference to this including 'a further increase in interest rates' is hard to interpret in any other way than the Board softly signalling the peak for the tightening cycle. The Board reaffirmed that policy will remain data-dependent, reflecting uncertainty over how the economy will evolve. Taking a less forward-looking approach is vulnerable to a scenario where more of the downside risks start coming to fruition. Markets are pricing in around 2 rate cuts by year-end, a reasonable outlook in my view.
Despite the recent inflation data coming in broadly in line with the RBA's forecasts, remaining on track to return to the 2-3% target range from next year (reaching the midpoint in 2026), the messaging in today's Board statement and in Governor Bullock's press conference was cautious. In short, the Board hasn't seen enough signs to indicate that inflation is headed back to 2-3% on a sustainable basis. It still judges the labour market as tight and unit labour cost growth 'remains very high'. Concern, therefore, remains around services prices.
The statement noted that elevated services inflation is consistent with excess demand in the economy, a point later reiterated by Governor Bullock. The RBA's narrative is that while the growth rate in the economy has slowed sharply (and is unequivocally weak for consumption), demand remains at a level that exceeds the supply capacity of the economy. I remain unsure as to how the RBA can be as adamant as it is on this point, but if growth remains weak then this imbalance it is seeing will continue to diminish.
In the concluding paragraph, the wording that 'a further increase in interest rates cannot be ruled out' was scrapped in place of 'the Board is not ruling anything in or out'. While it doesn't preclude another hike - as unlikely as it is - the change still seems purposeful. The tightening cycle started in May 2022 and in every decision statement up until today, there has been a clear reference inserted to indicate the possibility or expectation of higher rates. Notably, 'not ruling anything in or out' means there is no direct pushback to rate cut pricing. The next RBA meeting is on 6-7 May.
