As we expected, the RBA Board raised the cash rate target by ¼ percentage point to 4.35%. Their inflation outlook is stronger, and so is their outlook for the labour market. But follow-up increases in rates are far from assured.
At its November meeting, the RBA Board raised the cash rate target by ¼ percentage point to 4.35%. This is a break from the run of meetings where it was comfortable to hold steady and monitor the evolving situation. Given its low tolerance for upside surprises, a stronger inflation outlook and some unexpected resilience in the real economy has induced the Board to act.
As we noted last month, the CPI release for the September quarter tipped the balance in favour of raising the cash rate further. The Governor’s statement noted that inflation “is proving more persistent than expected a few months ago” and that “progress looks to be slower than earlier expected”. The considerably rewritten statement was noteworthy for the detailed explanation of what the Board had previously believed, and how things have changed since the RBA’s last forecast round in August.
Services inflation has remained sticky and there are some concerning signs in housing-related inflation and the prices of some retail goods. The Governor’s statement highlighted that many services prices “are continuing to rise briskly”. The language of the statement shows that the Board is increasingly concerned that inflation will not decline on the trajectory it is aiming for, and so it has decided to take out more insurance to achieve the desired result. That is despite the reduced risk of a price–wage spiral that the Board called out in the October minutes.
The RBA’s forecast for inflation over 2024 have been revised up, from 3.3% to 3½% now. More detail will be made available on Friday with the release of the November Statement on Monetary Policy. Our own forecasts have also been revised up over the past month. Also noteworthy is that the RBA’s unemployment forecast for end-2025 has been revised down from 4.5% to 4¼%. We will know more on Friday, but this seems like a nod to the signs of unexpected resilience in parts of the real economy.
We do not expect that the RBA will follow up with another rate increase in December. The last paragraph of the statement contained a shift in language from “Some further tightening of monetary policy may be required” used in the October media release to “Whether further tightening of monetary policy is required”. This reads as the Board hoping not to have to raise rates again, but being very willing to do so if things change. There is not enough new information between now and the December meeting to drive a change in view. Given the upgraded inflation forecasts and lower unemployment forecast, though, they are likely to have even less tolerance for upside surprises than they indicated in recent communication. So while a December move is unlikely, it is more likely that February meeting would become ‘live’ if the inflation outlook continues to lift.
Next year the RBA Board moves to a timetable of eight meetings per year, rather than the traditional eleven. This means that all meetings will follow significant data releases, including either the quarterly CPI or the national accounts. Enough new information will be able to be accumulated between each meeting that the RBA’s view of the outlook could shift. From the new year, all Board meetings should therefore be considered potentially ‘live’ in a way that was not the case in the past.
The RBA’s decision stands in contrast to the recent decisions of the FOMC, ECB and Bank of England to hold rates at their recent meetings. At a deeper level, though, all of these central banks are facing similar decisions. They have already raised policy rates a lot, and monetary policy is now restrictive in all these economies. Each central bank is watching the data unfold for signs that they need to do more. Countries such as the United States are further along the disinflation journey, just as they were earlier to experience the surge in inflation. They also would have more confidence in that the disinflation will unfold as expected. The RBA Board has not yet achieved that level of comfort.
