The RBA signed off for 2024 leaving rates on hold at today's meeting (cash rate 4.35%, ES rate 4.25%), but a dovish shift from the Board has prepared some of the groundwork for rates to start being lowered in Australia early next year. Confidence around inflation returning to the 2-3% target band has increased while the labour market remains robust. To continue to steer down the 'narrow path', the RBA will want to avoid being late to reduce restrictive policy. A 25bps rate cut is fully priced by April but could plausibly come at the next meeting on 17-18 February if the Q4 CPI report (29 January) shows sufficient progress on underlying inflation.
The RBA has maintained a hawkish narrative throughout 2024 against the backdrop of the global easing cycle, but the Board softened that stance in today's decision statement. Key references that have appeared in every statement since August of the Board needing to 'remain vigilant to upside risks to inflation' and maintain rates at a 'sufficiently restrictive' level were removed and replaced with the line that 'the Board is gaining some confidence that inflation is moving sustainably towards target'. In the post-meeting press conference, Governor Bullock confirmed these were deliberate changes that reflected an evolution of the Board's thinking after key data had come in softer than expected.
My preview of today's meeting outlined that a dovish shift from the Board was possible but assessed as an unlikely scenario. That was due to Governor Bullock's most recent speech on 28 November reaffirming the RBA's hawkish tone around elevated underlying inflation, excess demand, and a tight labour market. But the unknown going into today's meeting was whether or not the weak set of National Accounts that subsequently reported GDP growth in Q3 at 0.3%q/q, 0.8%Y/Y on December 4 would be enough to shift the RBA's view. Ultimately, this appears to have been the case, so in that context, a dovish shift was a prudent move from the Board today.
Ultimately, the RBA left markets with the underlying message that policy is closer to being eased. Governor Bullock highlighted that soft data was a function of restrictive rates, leading to an easing of upside inflation risks and a reduction of demand-supply imbalances. A key uncertainty for the Board domestically is how quickly consumption responds to rising real incomes. The early signs from the Q3 national accounts have raised some risks around this dynamic. The summer break will now give the RBA the chance to assess the state of the consumer over the holiday period, as well as taking in key developments offshore.
