The RBA left the cash rate at 3.6% in a unanimous decision by the 9-member Monetary Policy Board at today's meeting in Sydney. Having cut rates on three occasions this year by a total of 75bps, today's message was one of caution from the Board, with the full effects of less restrictive policy still to play out and due to upside risks to inflation. Markets interpreted this as a hawkish hold that indicated a rate cut at the next meeting on Melbourne Cup day was now less likely than a 50/50 prospect. At the post-meeting press conference, Governor Bullock said the outcome will come down to the upcoming inflation and labour market data and the RBA's updated economic forecasts.
Today's decision to leave rates unchanged was widely expected, continuing the cut-hold sequence the RBA has stuck to since its easing cycle commenced in February. Key factors the Board cited in its decision statement were the recovery in private demand, areas of inflation persistence and labour market tightness. Rate cuts are seen to be working as anticipated but will likely continue to support demand and that has the RBA cautious at this stage. The domestic data and developments offshore (particularly around trade) hold the keys to unlocking further easing. Markets still expect the RBA will cut rates at least once more this cycle, though that is not fully priced until next year now.
The uptick in the monthly CPI data through July and August have suggested to the Board that inflation may be set to come in stronger in Q3 than RBA staff earlier forecast. The full quarterly CPI report that the Board sets policy to is not due until late October. Governor Bullock said the labour market had eased with employment growth slowing and wages growth cooling, but the Board still judged conditions to be skewed towards the tight side.
Positive signs have emerged around the consumer, which the Board attributed to rising real incomes, wealth effects, and the earlier rate cuts. There is a case that this makes the need for further easing a little less pressing, though the Board does not seem entirely convinced by the durability of this recovery. On the other hand, if the recovery is sustained, the Board sees risks that businesses may start to pass through higher costs again and tightness in the labour market could reaccelerate. The next RBA monetary policy meeting is due for November 3-4.
