With the immediate rush of the RBA’s decision now over for another meeting (and the latest Statement on Monetary Policy), the focus is now on economists and analysts piecing together their thoughts.
“Interestingly, it appears that the RBA has become even more optimistic in the trade-offs it faces. Compared to its prior set of forecasts, tighter financial conditions are expected to bring inflation down from a higher starting point to the RBA’s target over the same timeframe, but without much impact on GDP, and with a lower unemployment rate.
“However, this is a bold assumption. The economy still appears to be around its full capacity, or full employment and as has been evident in prior period of disinflation, often a sharper rise in the unemployment rate or slower growth, is needed to bring inflation down to target.
“Our central case is that the RBA will be on hold through 2024. We have had this view since late 2023, and for some time have noted that cuts were unlikely in 2024. Our central case is for a shallow easing phase to begin in Q1 2025. However, we see a clear risk that it may take even longer for rate cuts to be delivered and some risk that the next move could be up not down.”
“The BDO Economics forecast shows that the 1% increase in quarterly CPI in March pushed the first cash rate cut into early next year. While we cannot rule out another cash rate increase between now and then, we would not be surprised if the RBA continues to hold the rate, trading off a delayed return of inflation to target against retaining strength in the labour market.
“The RBA has a lot to consider at the next board meeting, after the federal budget is announced, followed by state budgets. The anticipated yet uncertain scale of Future Made in Australia and state governments’ cash splurge on infrastructure are risks for inflation that the RBA will watch closely.”
“The statement highlighted that inflation is declining, but more slowly than expected. Services inflation is moderating only gradually, driven by a labour market that the RBA now assesses to be tighter than previously thought. It is noteworthy that the more forward-looking indicators in the RBA’s suite have eased more than lag indicators such as the unemployment rate.
“Monetary policy is assessed as restrictive, and the current level of the cash rate is seen as supporting continued progress on getting inflation back into the 2–3% target. In the media conference, the Governor confirmed that both a rate hike and holding rates unchanged were discussed at the meeting, with the Board ultimately deciding to hold.
“As for the past few meetings, the media release states that the Board will be attentive to ‘developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market’. Contrast that with the language in the Bank of Canada’s statement: ‘Governing Council is particularly watching the evolution of core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.’
“The RBA language downplays the roles of supply and of firms’ decisions to pass on higher costs in slowing the decline in disinflation. The RBA’s analysis instead remains that high inflation declining slowly is a signal that aggregate demand is still too high. We did, however, note a shift away from the language in the November 2023 minutes, where an inflationary mindset among businesses was noted.”