RBA Holds Cash Rate at 3.6%, Cautiously Keeps Its Options Open

Rates on hold and ongoing sensitivity to even small upside inflation risks. November cut far from assured but rate-cutting phase is not over.

• RBA Monetary Policy Board (MPB) keeps cash rate on hold at 3.6%, citing recovering private sector demand, an assessment that labour market conditions are stable, and the possibility that inflation might remain persistent in some areas.
• The post-meeting statement acknowledges that inflation is within the 2–3% target range. However, the RBA chose instead to highlight as a subheading that the rate of decline in underlying inflation ‘had slowed’ – hardly a surprise when the comparison is with the rapid decline from almost 7%. The statement noted that inflation would likely be higher in the September quarter than previously forecast but gave no steer on what this implied for subsequent quarters.
• The post-meeting statement was notably cautious and non-committal about the outlook. It also flagged that the MPB would review the outlook (as well as the risks, as in the language in August) in light of the incoming data. Maximum optionality has been retained but in our view, the choice is still when to cut further, not whether. With monetary policy still seen as ‘a bit restrictive’, the rate-cutting phase is not over.

The post-meeting statement again opened by noting that inflation has fallen substantially since 2022. Both headline and underlying inflation were acknowledged as being within the 2–3% target range, but it is noteworthy that this was not the headline in the statement. Rather, the post-meeting statement highlighted that the decline ‘had slowed’. This is hardly surprising as one approaches the desired end-point. Like the attention given to the monthly CPI indicator that the RBA had previously downplayed, the language choice suggests that the RBA remains sensitive to even small upside risks to inflation.

Indeed, in the media conference, the Governor emphasised the upside surprises in market services and housing-related inflation revealed in the August monthly data. Contrast this with the downplaying of the weaker monthly data a few months ago, and one cannot help getting the impression that the weight put on this indicator depends notably on how well it supports an existing broader narrative.

The post-meeting statement characterised conditions in the labour market as ‘remaining stable’, with the unemployment rate and measures of underemployment broadly constant even as employment growth slowed, and by more than the RBA expected. We think this assessment could be too bullish, noting the longer-term underlying trend for the participation rate to rise, and the role of cost-of-living pressures boosting labour supply until recently. The post-meeting statement mentioned liaison and survey measures of labour availability but not the ABS vacancies data, which gives a rather different impression of the direction of travel. (That said, the Governor did list vacancies in an answer in the media conference.) Likewise in the media conference, Governor Bullock contrasted current labour market conditions against an alternative of mass layoffs. This seems like an overly gloomy alternative when the question is whether to withdraw remaining policy restrictiveness.

Productivity growth was characterised as being weak (versus the August language of it not having picked up) and the outlook for productivity growth was described as uncertain, rather than its continued weakness being the uncertainty. This suggests a further evolution in the RBA’s views on this front with the release of the Q2 national accounts, following the major pivot in the RBA’s thinking on productivity outlines in the August SMP.

The statement also highlighted the ‘stronger-than-expected’ consumption growth data, attributing this to households possibly ‘becoming more comfortable consuming as real incomes and wealth rise’. Again, some recovery should be expected given that real incomes are finally rising. The risks around the consumption outlook and its implications for inflation were framed around whether current growth ‘persists’. We would note, however, that the ongoing unwind in growth in public demand means that growth in private demand (mostly consumption) needs to keep recovering to avoid an ‘air pocket’ in overall domestic demand. We also observe that the risk noted in the post-meeting statement of businesses potentially using this strength in demand to pass on cost increases was not evident in any data. In the media conference, the Governor acknowledged that this was merely a risk scenario.

Overall, this was a remarkably non-committal set of communications, making no mention of the previous forecasts being predicated on further cuts to the cash rate. The Governor mentioned that monetary policy is ‘still a bit restrictive’ in the media conference but there was no clear mention of the stance of policy in the post-meeting statement. If there was a skew to the messaging, it was in the direction of highlighting inflation risks. The RBA considers that the easier financial conditions stemming from the prior cash rate cuts are working their way through the economy broadly as expected, and that this will take time to be fully evident.

The MPB is clearly trying to give itself maximum optionality for the next few meetings. This means that our current base case of a cash rate cut in November is far from assured, though neither is it off the table. The longer the MPB delays further cuts, the more likely it is that it will end up cutting by more than it current envisages.