Reserve Bank of Australia Does Not Rule Out Future Hikes

The Reserve Bank of Australia kept rates unchanged at 4.35% as widely expected by analysts, keeping rates at the highest level since May 2012. RBA Governor Bullock sounded as there was in no hurry to cut rates describing rate risks as “fairly balanced” with inflation still “too high” and said, “a further increase in interest rates cannot be ruled out.” The messaging from the RBA was “we are not ruling in anything or out anything” and “need to stay the course.” The RBA rhetoric was hawkish, but this was shrugged off by markets. The Aussie moved higher compared to right before the communications landed after the RBA kept the door open for tightening up to 0.6523.

The 2s yield ended the session unchanged compared to moments before the statement, pricing for the March decision added 6bps to price half of a quarter point cut and a quarter point cut remains priced for the August meeting. Prior to the release, the August 6 meeting was 93% priced for the first rate cut of the cycle with 44 bps priced in by year end.

Revised forecasts expect inflation to come close to the mid-point of the 2–3% inflation target range only by the end of 2026 at 2.6% for headline and trimmed mean. RBA watchers will then have an eye on things like the next wages report that is going to be set against an accelerating trend.

RBA walking a thin line of inflation and recession.

Highlights

  • Cash rate unchanged at 4.35%
  • While recent data indicate that inflation is easing, it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range
  • Inflation continued to ease in the December quarter. Despite this progress, inflation remains high at 4.1 per cent.
  • Goods price inflation was lower than the RBA’s November forecasts.
  • Services price inflation, however, declined at a more gradual pace in line with the RBA’s earlier forecasts and remains high.
  • While there have been favourable signs on goods price inflation abroad, services price inflation has remained persistent and the same could occur in Australia.
  • Wages growth has picked up but is not expected to increase much further and remains consistent with the inflation target
  • The outlook is still highly uncertain.
  • While there are encouraging signs, the economic outlook is uncertain and the Board remains highly attentive to inflation risks
  • Services price inflation is expected to decline gradually as demand moderates and growth in labour and non-labour costs eases.
  • The Board needs to be confident that inflation is moving sustainably towards the target range.
  • To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case
  • Headlines via Reuters
  • The RBA will hold a press conference one hour after the decision

The total of 410bps rise also marked the sharpest annual tightening since 1989.

Reserve Bank of Australia Interest Rate

Michele Bullock, Governor: Press Conference

  • We are not ruling anything in or out on policy
  • We still think risks are balanced
  • What we’re really looking for is data that assures that inflation is coming back to target
  • We’ve had good news so far on inflation but it still has a ‘4’ in front of the the inflation rate
  • We don’t want inflation expectations to rise
  • Tax cuts are not a material issue for inflation and spending
  • We need to be sure we won’t have to backtrack on inflation
  • I feel we are potentially on the narrow path to getting inflation back to target, cites 2.8% 2025 inflation forecast
  • Says confidence level on getting there is 5/10, more data needed
  • I’m really convinced we can bring inflation down without too much pain in the labour market
  • We judge risks to inflation as fairly balanced
  • Employment is still growing and the board, I can assume you, is very, very focused on that
  • We’ve got to be confident that we’ll get to the midpoint of the target to think about interest rate cuts

Statement by Michele Bullock, Governor: Monetary Policy Decision

Number 2024-01 Date 6 February 2024

At its meeting today, the Board decided to leave the cash rate target unchanged at 4.35 per cent and the interest rate paid on Exchange Settlement balances unchanged at 4.25 per cent.

Inflation continues to moderate but remains high.

Inflation continued to ease in the December quarter. Despite this progress, inflation remains high at 4.1 per cent. Goods price inflation was lower than the RBA’s November forecasts. It has continued to ease, reflecting the resolution of earlier global supply chain disruptions and a moderation in domestic demand for goods. Services price inflation, however, declined at a more gradual pace in line with the RBA’s earlier forecasts and remains high. This is consistent with continuing excess demand in the economy and strong domestic cost pressures, both for labour and non-labour inputs.

Higher interest rates are working to establish a more sustainable balance between aggregate demand and supply in the economy. Accordingly, conditions in the labour market continue to ease gradually, although they remain tighter than is consistent with sustained full employment and inflation at target. Wages growth has picked up but is not expected to increase much further and remains consistent with the inflation target, on the assumption that productivity growth increases to around its long-run average. Inflation is still weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment.

The outlook is still highly uncertain.

While there are encouraging signs, the economic outlook is uncertain and the Board remains highly attentive to inflation risks. The central forecasts are for inflation to return to the target range of 2–3 per cent in 2025, and to the midpoint in 2026. Services price inflation is expected to decline gradually as demand moderates and growth in labour and non-labour costs eases. Employment is expected to continue to grow moderately and the unemployment rate and the broader underutilisation rate are expected to increase a bit further.

While there have been favourable signs on goods price inflation abroad, services price inflation has remained persistent and the same could occur in Australia. There also remains a high level of uncertainty around the outlook for the Chinese economy and the implications of the conflicts in Ukraine and the Middle East. Domestically, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand, and while the labour market remains tight. The outlook for household consumption also remains uncertain.

Returning inflation to target is the priority.

Returning inflation to target within a reasonable timeframe remains the Board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment. The Board needs to be confident that inflation is moving sustainably towards the target range. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.

While recent data indicate that inflation is easing, it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range. The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out. The Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.

Source: RBA

Via a Sunburnt Country

From The TradersCommunity News Desk