The RBA Board is widely expected to leave its key interest rate unchanged (4.35%) at today's meeting (decision due 2:30pm AEST). Aside from the decision, today provides the platform for the RBA to firmly set the narrative on the policy outlook via updated growth and inflation forecasts and at Governor Bullock's post-meeting press conference.
A recap: RBA leaves all options on the table
At its March meeting, the Board left the cash rate at 4.35%, a setting unchanged since last November. Over this period of steady interest rates, the Board's guidance has shifted gradually from a tightening bias back in November to a more neutral stance by March where "the Board is not ruling anything in or out". Although this shift has been meaningful, its messaging on policy has essentially remained the same: monetary policy is working to slow demand and bring down inflation but a return to the 2-3% inflation target band is not yet assured. By contrast, markets have been much less stable in their outlook, swinging from pricing in 2-3 rate cuts in 2024 at the start of the year, then expecting no rate cuts, and more recently moving towards pricing in further tightening.
RBA to hold a steady hand, though a hawkish turn is a risk
Turning to today's meeting, I think rates will remain on hold, with the Board retaining the line that it is not ruling anything in or out. In March, the risks to both sides of the RBA's mandate for inflation and employment were judged to have become "a little more even" and I don't expect a material change to this assessment today. That view is based upon the Board remaining content that inflation is still projected to return to target "within a reasonable timeframe", currently expected in mid-2026.
The main risk is that the Board takes a more hawkish turn if the new forecasts (prepared by RBA staff, not the Board) to be published today contain upward revisions to the inflation outlook following the stronger-than-expected Q1 CPI report. Currently, headline inflation (3.6%Y/Y) is projected to ease to 3.3% by mid-year; 3.2% by year-end and eventually near the midpoint of the target band in mid-2026 (2.6%). Similarly, the core rate (4%Y/Y) is seen at 3.6% mid-year; 3.1% year-end; and 2.6% in mid-2026. The RBA's tolerance to a mid-2026 timeframe is subject to the incoming risks it sees, particularly in the areas it has highlighted including services prices and labour costs; if that tolerance is breached then it could hike again, or at least strengthen the signal it sends today that it could do so at an upcoming meeting.
One factor to consider, however, is that the conditioning assumption used for the cash rate in the new forecasts will be higher than it was in the February Statement on Monetary Policy. In February, the cash rate profile (an amalgamation of market pricing and economists' views) factored in 4-5 rate cuts over the next couple of years to mid-2026, including 2 cuts in 2024. Market pricing now discounts 2 cuts at most by the end of 2025. A higher cash rate track will put downward pressure on the forecasts for inflation and growth while pushing up the outlook for the unemployment rate (3.9% average in Q1), currently projected to rise to 4.3% by year-end and 4.4% by 2025.