The RBA left the cash rate on hold at 4.35% (and the ES rate at 4.25%) at today's meeting, marking 12 months of unchanged monetary policy settings in Australia. There was little reaction in either the bond or FX market, with pricing for an RBA rate cut remaining all the way out in May next year following today's decision statement, updated economic forecasts in the Statement on Monetary Policy, and Governor Bullock's press conference. The RBA has not moved from its assessment that aggregate demand in the economy is exceeding supply, reaffirming that rates need to be kept 'sufficiently restrictive' with inflation still not expected to return 'sustainably' to the 2-3% target range until 2026.
The main shift in today's statement compared to the September meeting was the Board's emphasis on underlying inflation. This came after headline inflation declined from 3.8% to 2.8% year-ended in Q3, falling inside the 2-3% target range on electricity rebates and lower fuel prices. Today's statement noted that underlying inflation was a better gauge of the momentum of inflation, and at 3.5%Y/Y (down from 3.9%) it remained elevated to target.
Accordingly, the Board clarified that its priority is to return inflation to target 'sustainably'. For this to occur, underlying inflation needs to decline further. In the post-meeting press conference, Governor Bullock highlighted that lower services inflation and an easing in the pace of wages growth will be key to achieving this. But this is expected to be a protracted process; based on today's updated forecasts, underlying inflation is not seen returning to the midpoint of the target until 2026, an outlook largely unchanged from the August forecast round. But there are risks to this outlook - both to the upside and to the downside - and Governor Bullock said the Board needed to gain greater confidence that underlying inflation is on track to return to target before it could consider cutting rates.
The statement also focused on the strength of the labour market. Although conditions have eased, the RBA continues to assess that the labour market is tight relative to its judgement of full employment. Importantly, the RBA is neither seeking nor thinking that a deterioration in the labour market is needed to return inflation to target. For some time, the RBA has stated its strategy is to gradually bring inflation down in order to preserve the gains in employment achieved through the post-Covid cycle.
All told, the RBA has retained its relatively hawkish tone compared to its G10 central bank peers currently cutting rates. The RBA is effectively data-dependent, and its messaging will start to shift if either employment or inflation deteriorates unexpectedly. The next RBA meeting is on 9-10 December.