The monetary policy cycle in Australia is yet to turn and the RBA is likely to again push back on prospects for near-term rate cuts as it leaves the cash rate on hold (4.35%) at today's meeting in Sydney. Still awaiting greater control over inflation while also seeing a labour market that remains robust, the RBA is one of only 3 central banks in the G10 FX space not cutting rates. The global easing cycle has ramped up with the Federal Reserve delivering a frontloaded 50bps cut in the US last week, but the RBA is set to remain on the sidelines into year-end.
Strong debate going into the previous meeting in August over whether the RBA would hike or hold was settled by the RBA maintaining the cash rate at 4.35%. Although a hike was considered, the Board concluded that holding rates struck a better balance at this stage of the cycle in terms of managing the risks to both sides of its mandate for inflation and employment. Recall that the strategy the RBA has said it is pursuing is to bring inflation down to the 2-3% target range with employment continuing to increase. With the cash rate having now been on hold since last November, the RBA has a good sense of the effects of its monetary tightening - GDP growth is weak (1%Y/Y in Q2) and tightness in the labour market has eased - but Governor Bullock has said repeatedly that slow progress on inflation means that rate cuts are out of the question.
Accordingly, the key themes at today's meeting are likely to remain on the same lines as in August. Expect the Board to reaffirm that it needs to 'remain vigilant to upside risks to inflation' and that it will keep monetary policy 'sufficiently restrictive' until greater confidence that inflation is on track to return to the target range is gained. This continued focus on inflation comes with the recent labour market data backing up the RBA's assessment that conditions remain tight relative to full employment. Strength in employment has kept the unemployment rate low at 4.2% amid record high labour force participation (67.1%).
On the markets, there is scope for a hawkish repricing today on further RBA pushback. In alignment with the declines in global bond yields as central banks offshore have moved to cut rates, the key 3-year Australian bond yield has fallen significantly over the past couple of months to trade around 75bps through the cash rate. That is probably enough of a discount given the RBA has made it clear they will be patient in moving into their easing cycle. This could provide additional support to the Australian dollar, which according to the RBA's trade-weighted index has lifted by more than 2.5% since the August meeting.