As we expected, the RBA Board kept rates on hold following its December meeting. Information received since the previous meeting in early November was considered ‘broadly in line’ with their expectations. The Governor’s decision statement emphasised that inflation continues to moderate, driven by the goods sector. Ahead of its meeting in February 2024, the Board will be focused on the December quarter CPI result. If inflation does not decline as the RBA intends, the Board will respond with increased rates. But this is not the most likely outcome.
As we expected, the RBA Board kept rates on hold following its December meeting. Information received since the previous meeting in early November was described as ‘limited’ and considered ‘broadly in line’ with their expectations. Given that, the Board did not see a need to follow up last month’s increase with another this month. Recall that the RBA’s November forecasts were predicated on ‘one to two’ increases in the cash rate, with one having already been delivered. By pausing this month, the RBA Board is giving itself ‘time to assess’ the impact of recent rate increases. The statement noted that both household consumption and dwelling investment are weak, and that conditions in the labour market are continuing to ease gradually.
The Governor’s statement noted that ‘[h]igher interest rates are working to establish a more sustainable balance between aggregate supply and demand in the economy. The impact of the more recent rate rises, including last month’s, will continue to flow through the economy.’ In other words, policy is working as normal. The Board would be aware that further rate increases from here will have much of their impact at least a year from now – by which time inflation should already be at or close to target.
The October CPI indicator was lower than market forecasts and, we believe, the RBA’s expectations. Much of this surprise was in noisy components such as fuel and holiday travel, which the RBA will tend to look through. The Governor’s statement highlighted the role of goods prices in driving the decline in inflation. It also called out that the October release contained little information on services inflation, which is the centre of the Board’s concerns.
Given the Board’s determination to return inflation to target in a reasonable timeframe, it is understandable that the Governor’s statement does not highlight downside risks to inflation. Even so, the October outcome does point to downside risks tempering the upside risks to inflation. One of these potential downsides is that government rent assistance weighed on rent inflation by more than expected. Unlike electricity rebates, this is a lasting reduction in rent levels and does not involve the ‘payback’ seen when temporary measures expire. In addition, headline inflation is what people experience, so the downside surprise in the October indicator lowers the risk of inflation expectations rising. The Governor’s statement after the meeting repeated the Bank’s assessment that inflation expectations remain consistent with the RBA’s inflation target. It also repeated the language of earlier statements about wages growth being consistent with inflation returning to target, ‘provided productivity growth picks up’.
Among the changes to the statement from last month was an acknowledgement that there are ‘encouraging signs on goods inflation abroad’. Recent downside surprises for inflation in some major advanced economies would surely also have been some comfort to the Board, given the global nature of the inflation pressures coming from goods and energy prices. While the Governor’s statement does not mention it, the appreciation of the exchange rate over recent weeks is also helpful for dampening inflation pressures, at least at the margin.
A noteworthy change in the language of the Governor’s statement is the recap of the reasoning behind the previous month’s decision to increase rates. A similar recap of the evolution of the Board’s thinking was also included in the Overview of the November Statement on Monetary Policy. We interpret this as part of the Bank’s response to the RBA Review’s recommendations for clearer and more straightforward communication.
In the lead-up to the next meeting in February, the RBA Board will be assessing whether inflation is declining fast enough to reach the 2–3% target in 2025. They have no tolerance for further delays in the return of inflation to target beyond this date. Any upside surprises will be met with further policy action. For this reason, the February meeting should still be considered ‘live’. It remains our view, though, that it is more likely than not that the RBA has reached the peak of its rate hiking cycle.
