There were few surprises at today's RBA meeting. Interest rates were left unchanged (cash rate 4.35% and exchange settlement rate 4.25%) and the Board held the line that it "is not ruling anything in or out". Two years on from the start of the tightening cycle, inflation remains well above the 2-3% target band but the Board is content that monetary policy is in a good place to see the job through without inflicting too much damage on the economy and the labour market. With the RBA's messaging defying expectations for a more hawkish tone, the Australian dollar weakened and bond yields declined sharply.
Broadly speaking, my interpretation of today's developments was that the RBA has not lost patience with its strategy, aiming to gradually return inflation to target while preserving the labour market. Governor Bullock said at the post-meeting press conference that a rate hike had been discussed but the Board concluded it was not warranted. This was despite the near-term outlook for inflation rising in the May Statement on Monetary Policy: headline inflation is now expected to end the year at 3.8% (from 3.2% previously) with the core rate at 3.4% (from 3.1%), upgrades that reflect stronger services inflation, a tighter labour market and higher petrol prices. Governor Bullock said the Board could remain "vigilant" to these risks without needing to act now.
Notwithstanding the higher outlook near term, inflation is still projected to return to the midpoint of the target band by the end of the projection horizon in mid-2026. This is largely because the new assumption for the cash rate in the May forecasts is notably higher than in the February forecasts, reflecting the global repricing of expectations for easing cycles. Imputing market pricing, the May forecasts push back the timing for the first rate cut to mid-2025, ending the projection period in mid-2026 (3.8%) around 50bps higher than assumed in February.
Although the implicit assumption is for the cash rate to stay restrictive for longer, there was minimal effect on the growth outlook other than a slight moderation in GDP growth this year from 1.8% to 1.6%. On the labour market, the RBA has been surprised by the resilience it has seen this year, resulting in its outlook for the unemployment rate being trimmed from 4.3% to 4.2% in 2024 and from 4.4% to 4.3% in 2025. For some time, I had been of the view that the unemployment rate would rise more slowly than the RBA was projecting, so this was an encouraging development.