The RBA Board is widely expected to leave its key interest rate unchanged (4.35%) at today's meeting (decision due 2:30pm AEST). While inflation remains elevated to the 2-3% target, the Board sees increasing signs of the effect of its monetary tightening in slowing growth and in the labour market. This will be enough for the Board to remain on hold today, though it is likely to reiterate its caution around the policy outlook by retaining the line that it is 'not ruling anything in or out'. Markets price an RBA rate cut by year-end as slightly stronger than a 50/50 chance.
A recap: Higher interest rates are working
At the previous meeting in May, the Board held the cash rate at 4.35% - a setting unchanged since last November. The key takeaway from the meeting was that the cash rate was assessed to be at a restrictive level, placing downward pressure on inflation by slowing demand to be more closely in balance with supply. Additionally, the Board reaffirmed its commitment to the existing monetary policy strategy, aiming to bring inflation back to the target band 'within a reasonable timeframe' in a way that preserves the employment gains achieved following the recovery from the pandemic.
Slowing growth to reaffirm the RBA's stance
The Board has several new inputs to consider at this meeting. The monthly CPI series reported an uptick in headline inflation to 3.6% in April and the underlying measures remaining firm at around 4%. Although this is very unlikely to have implications for the RBA's projection for a return to the 2-3% band in the second half of next year (and the midpoint in 2026), expect the Board to reaffirm that this indicates that it will not be a smooth journey back to the target.
Data on the labour market has continued to indicate that conditions remain consistent with the Board's description of 'tight'; however, the unemployment rate and the broader underutilisation rate have eased notably from their cycle lows in late 2022 to early 2023. Alongside this, the Q1 Wage Price Index suggested that the pace of wages growth (4.1%Y/Y) has likely peaked.
The Q1 National Accounts reported that momentum in the economy slowed further in early 2024, with GDP coming in at a weak 0.1%q/q and 1.1%Y/Y - the slowest annual growth rate outside the pandemic since the early 1990s. Importantly, however, domestic demand (0.2%q/q, 2.3%Y/Y) was stronger than headline growth, and there were upward revisions to household consumption growth that imply households have been more resilient to cost-of-living pressures and higher interest rates than previously estimated.
The outlook for consumption remains one of the key uncertainties for the Board. Consumption growth has been revised upwards, but estimates of the household saving ratio have fallen. With inflation forecast to slow further, improving real incomes are expected to support consumption. In addition, there will be interest in the Board's commentary on the cost-of-living support measures included in the recent Federal budget and other initiatives announced by state governments.
All considered, developments since the May meeting appear unlikely to have moved the dial for the RBA from its position of awaiting more data and 'not ruling anything in or out' from a policy perspective. If the decision statement remains largely unchanged, then markets will take their cues from the tone of Governor Bullock's press conference.
