For the 5th meeting in succession, the RBA Board left interest rates on hold; the cash rate remaining at 4.35% and the Exchange Settlement Rate at 4.25%. Markets formed a modestly hawkish interpretation from today's statement and Governor Bullock's press conference; however, not much appears to have changed since the May meeting. The RBA, like its peers overseas, is in data-dependent mode reluctant to give many clear signals on the policy outlook.
Following today's meeting, the 3-year Australian government bond yield lifted by around 6bps (3.86%) and the Australian dollar traded firmer, with much of the commentary focusing on the hawkish aspects of Governor Bullock's remarks - notably that a rate hike was considered. However, that should not be surprising as the Board has discussed hiking rates at every meeting except one since the tightening cycle commenced in May 2022. Given markets rarely hear from the RBA in between meetings, there can be a danger of over-analysing what occurs on decision day. I think today falls into that category.
As reiterated today, tighter monetary policy is working. The reality is that over the past 12 months, the quarterly CPI has fallen from 7%Y/Y to 3.6%Y/Y; unemployment is around 1/2ppt higher (4% in May); and GDP growth has slowed from 2.3%Y/Y to 1.1%Y/Y. The RBA, mindful of the lags associated with policy tightening, has raised rates only once over this period, by 25bps last November. The broader strategy of aiming to avoid a recession by gradually returning inflation to target was reaffirmed as recently at the May meeting and revisited today. Clearly, the Board is cautious about how the economy and inflation will evolve, retaining the guidance that it is 'not ruling anything in or out' from a policy perspective. The hawkish interpretation is that this does not preclude another hike, but the dovish reading is that a cut is possible as the next move.
Looking into today's statement, there were some interesting additions. The Board assessed that the disinflationary process slowed through the early part of the year; however, as discussed in my preview, this has not caused the RBA to revise its inflation outlook. Governor Bullock said that a fuller assessment of the situation will require the Q2 CPI report, not due until 31 July. The Board expects that the recent cost-of-living measures announced by the Federal and state governments will lower headline inflation temporarily, but they could also strengthen demand.
Reflecting upon the Q1 National Accounts, the Board said that 'momentum in economic activity is weak'; however, it noted the upward revisions to household consumption growth, implying a more resilient household sector. Governor Bullock said those revisions had resolved some question marks the RBA had over the weakness earlier reported. That said, the governor also noted the saving ratio had been revised lower, possibly explained by households needing to spend more to cover the necessities. The consumption outlook is supported by the expectation that real incomes will continue to rise; the stage 3 tax cuts; and by wealth effects from the rise in housing prices. On the other hand, consumption could fail to pick up as expected and a deterioration in the labour market would be a major headwind.
All in all, the RBA will return to watching the data, with its forecasts due to be updated for the next meeting on August 5-6.
