The RBA revised up its near-term inflation forecast in November and delivered one of the “one to two” rate increases assumed in their forecasts. Not enough new information has come to hand since then to warrant delivering a second increase just yet. The monthly CPI indicator is volatile, but the October reading was a bit below expectations. The RBA is still ready to raise rates further if it sees further upside surprises on inflation. It has no tolerance for more delays in the return to the inflation target. So February is still live, but we don’t see them moving in December.
Today we reaffirm our view that the RBA is unlikely to raise the cash rate at its December meeting.
As described in the minutes of the November meeting, the staff forecasts were “predicated on there being an additional one to two increases in the cash rate over coming quarters”. The peak in rates assumed in the forecasts is “around 4½ per cent” according to the RBA’s latest Statement on Monetary Policy (SMP). One of these increases was already delivered following the November meeting. The question the RBA will be grappling with in coming months is what they need to see to turn one-and-a-half into two.
As outlined in Senior Economist Justin Smirk’s note on the monthly CPI indicator yesterday, inflation in October in fact surprised a little on the downside. These data are noisy and neither the RBA nor we take full signal from a single monthly reading. Some of the biggest downside misses, such as for holiday travel, could reverse out. Moreover, most of the services components – which have been such a source of concern to the RBA – are not included in the first month of the quarter. We will not know how these are tracking until the November and December releases.
That said, there were some pleasing signs in prices of some goods. While the RBA has characterised the disinflation in goods prices as in line with its expectations, it is worth noting that the Bank’s forecasts assume that global goods inflation declines as supply chains recover, but that global goods prices do not fall much in absolute terms. Indeed, the SMP has for the past several quarters briefly outlined a scenario where one-third of the pandemic-era run-up in prices does reverse. In that scenario, inflation returns to target next year, not in 2025. Given that producer price indices are in fact falling in a range of economies, there is a reasonable chance that this downside scenario plays out to some extent. The appreciation in the Australian dollar since the November meeting is also helpful in tempering the material upside risks to domestic inflation with a bit of downside risk around imported price inflation.
The other data released since the November Board meeting have also not provided enough of an upside signal to warrant moving in December. October retail sales were soft; unemployment and underemployment are drifting up as expected; and business surveys are pointing to price pressures easing from high levels. While employment growth was strong in the month, it has been volatile and affected by the rapid cycle in population growth. Measures expressed as ratios, such as the unemployment rate, participation rate and employment-to-population ratio, provide a better signal in these circumstances. These data have been playing out broadly in line with the RBA’s forecasts. Together with the downward revision in the RBA’s wages forecasts, we do not see an upside surprise on inflation – and so a reason for the RBA Board to move again this month – coming from this source.
Ahead of the October CPI release, RBA Governor Bullock had been strengthening the rhetoric about inflation risks. This could be construed as softening the public up for planned future rate increases. A more likely interpretation is that the Governor has been both seeking to explain the rate increase that has already occurred and signalling that further increases would occur if inflation were to decline more slowly than the RBA intends. As we have noted earlier, the RBA has been surprised on the high side by recent inflation data. If the Board really thought that further increases beyond November were a certainty, though, they would not have agreed to changing the language in the November media release, SMP and minutes to read “Whether further tightening of monetary policy is required…”. This was a notable shift from the previous phrasing of “Some further tightening of monetary policy may be required”.
By the time of the February meeting, the RBA will have the full December quarter inflation data as well as the September quarter national accounts and other key data. We reaffirm our view that the RBA Board would raise the cash rate at that meeting if it sees further upside surprises to inflation or fresh evidence suggesting that inflation will decline more slowly than it intends. If things play out broadly in line with their forecasts, though, further moves would be harder to justify. In that case, it would be likely that the RBA would hold the cash rate steady. Currently we believe this is the more likely outcome.