The RBA left its key policy rates on hold at today's meeting (cash rate 4.35% and exchange settlement rate 4.25%). Inflation dynamics in Australia mean the RBA will be away slowly in cutting rates, now not likely to occur before February 2025 at the earliest. An RBA that will stay on the sidelines as the global easing cycle continues points to added support for the Australian dollar, something that Governor Bullock said today would be welcome from an inflationary perspective.
Today's decision to remain on hold came across as having been straightforward for the Board. Key data since the August meeting did not surprise - Q2 GDP growth came in weak (1%Y/Y) and the labour market remained robust with solid employment gains and low unemployment (4.2%) - warranting little reason for a policy change. In the post-meeting press conference, Governor Bullock reiterated that rate cuts weren't on the radar for the Board, but neither did it consider a hike today - a mildly dovish tilt from August where a 25bps hike was discussed. This may explain the 11bps decline in the Australian 3-year bond yield to 3.45% in today's trade.
The Board's decision statement repeated the same key themes that were highlighted at the previous meeting: inflation is proving persistent; the outlook is uncertain; and returning inflation to the 2-3% target band remains the priority. Continuing to assess that there is excess demand in the economy, the statement reaffirmed that the Board is 'vigilant to upside risks to inflation'. Accordingly, the guidance that policy needs to remain 'sufficiently restrictive' until the Board is assured inflation is on track to return to target is still intact. Moreover, Governor Bullock said that inflation needs to return to target 'sustainably'. CPI data for August tomorrow will likely show a sharp fall in headline inflation to 2.7%yr as energy rebates and other cost-of-living support measures kick in. However, the statement noted the Board's focus is on underlying inflation, which is not forecast to approach the midpoint of the band until 2026.
Developments today have reaffirmed that the RBA is at a clear divergence from its central bank peers that have cut rates across the US, Europe, UK, Canada and New Zealand. Governor Bullock said this situation reflected several factors including that the RBA didn't raise rates by as much as other central banks; the domestic labour market has been more resilient than in other countries; and that disinflationary progress in Australia has been slower. As a result, the Board is content to preside over a policy divergence that will widen into year-end as other major central banks continue to cut rates. The next RBA meeting is on 4-5 November.