RBA Alters Inflation Expectations and Modifies Rate Messaging
Following its most recent interest rate hike, the Reserve Bank has adopted a more cautious stance, even though it acknowledges that inflation is persisting longer than anticipated.
The Reserve Bank of Australia (RBA) has broken its pattern of keeping rates unchanged due to the persistent inflation pressure it faces. The central bank is now projecting a slower path toward achieving its target range of 2 to 3 percent for headline inflation.
In its November meeting, the RBA implemented its 13th rate hike since the initiation of its tightening policy in May 2022. The official cash rate was increased by 25 basis points to 4.35%, marking the first rate hike after staying on hold in July, August, September, and October.
RBA Governor Michele Bullock commented, "Inflation in Australia has peaked but remains too high and is proving more durable than it was a few months ago. The latest Consumer Price Index (CPI) reading shows that while goods price inflation has continued to decline, the prices of many services are still rising rapidly."
The Australian Bureau of Statistics (ABS) reported a 1.2 percent increase in the Consumer Price Index (CPI) during the September quarter, resulting in a year-on-year increase of 5.4 percent.
According to the RBA's revised forecasts, CPI inflation is now expected to decline to approximately 3.5 percent by the end of 2024 and return to the top of the target range by the end of 2025. Previously, the central bank had predicted a drop to 3.3 percent by the end of 2024 and 2.8 percent by the end of 2025.
Ms. Bullock stated, "The decision to raise interest rates today was made to have more confidence that inflation would return to the target within a reasonable timeframe." She also warned that updated data received since the August meeting indicates an increased risk of inflation remaining elevated for a longer period.
While the economy is currently experiencing below-trend growth, it has been stronger than anticipated during the first half of the year. Underlying inflation has been higher than expected in August's forecasts, especially in various service sectors. Labor market conditions have eased somewhat, but they still remain tight, and housing prices are on the rise nationwide.
Since the October meeting, the RBA has included "the implications of international conflicts" as an additional uncertainty in its outlook, alongside longstanding concerns like service price inflation, monetary policy lags, and household consumption projections.
The statement post-meeting no longer suggests that "some further tightening of monetary policy may be required." Instead, Ms. Bullock emphasized that "whether additional monetary policy tightening is needed to ensure inflation returns to the target in a reasonable timeframe will depend on the data and evolving risk assessments."
Gareth Aird, Commonwealth Bank's head of Australian economics, noted that although the RBA maintains a tightening bias, it has softened it somewhat. He suggested that unexpected positive economic data, particularly regarding inflation, would be necessary for the RBA to raise the cash rate again.
Mr. Aird's base case scenario foresees the RBA maintaining the current monetary policy stance, with a possible monetary easing cycle beginning in September 2024. However, he acknowledged the short-term risk of another interest rate increase, given the RBA's continued bias toward tightening. Consequently, markets will likely continue to factor in the possibility of a near-term rate hike.
If the RBA does decide to raise rates again, Mr. Aird pointed to February 2024 as the most likely timing, as it would coincide with the release of Q4 2023 CPI data and updated economic forecasts.
Luci Ellis, Westpac's chief economist and former RBA assistant governor, observed that the RBA's November decision marks a departure from previous meetings where the central bank appeared content to maintain the status quo and monitor developments. She believes that while a December rate hike is unlikely, the February meeting could become more significant if the inflation outlook continues to improve.
On the other hand, Sean Langcake, Head of Macroeconomic Forecasting at Oxford Economics, suggested that the RBA might need to make further moves to achieve its inflation target if it is genuinely concerned about the inflation outlook. A single 25-basis-point increase may not be enough to alleviate their concerns. The board may wait for the next set of inflation data and potentially raise rates in February, particularly if the Wholesale Price Index (WPI) shows significant strength.