RBA keeps interest rates on hold, no cut on the horizon
The RBA stayed on hold today, but there were several “subtle but important” changes to the statement. We investigate if a cut is any closer.
Since the infamous “No rate hikes until 2024” gaffe made by former RBA Governor Phillip Lowe, the RBA has been painfully meticulous in its messaging, aiming for a consistency of message in the spoken and written word possibly not seen from any central bank before. For this reason, stodgy economist types like us tend to hang on to every carefully chosen RBA word, probing for hints of a change in tack.
You’ve probably already heard of today’s decision by the RBA Board to keep the official cash rate on hold at 4.35% – not great news for mortgage holders, but great news for anyone with cash in the bank. It was a widely anticipated move (or a non-move, as it were) despite several major global central banks cutting official rates over the last few months (the Fed by 0.5% just last week).
Let’s dig a little deeper than the usual “On hold, not ruling anything in or out” RBA veneer to see exactly what changed in their post-meeting Statement of Monetary Policy. Below, I have highlighted the key additions and removals between the current September statement and the most recent August statement.
Statement by the Reserve Bank Board: Monetary Policy Decision
Number: 2024-18
Date: 24 September 2024
At its meeting today, the Board decided to leave the cash rate target unchanged at 4.35% and the interest rate paid on Exchange Settlement balances unchanged at 4.25%.
Inflation remains above target and is proving persistent.
Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. But inflation is still some way above the midpoint of the 2–3% target range. In underlying terms, as represented by the trimmed mean, inflation was 3.9% over the year to the June quarter, broadly as forecast in the May Statement on Monetary Policy (SMP). Headline inflation declined in July, as measured by the monthly CPI indicator. ADDED: Headline inflation is expected to fall further temporarily, as a result of federal and state cost of living relief. However, our current forecasts do not see inflation returning sustainably to target until 2026. In year-ended terms, underlying inflation has been above the midpoint of the target for 11 consecutive quarters and has fallen very little over the past year.
The outlook remains highly uncertain.
REMOVED: The economic outlook is uncertain and recent data have demonstrated that the process of returning inflation to target has been slow and bumpy.
The central forecasts published in August were for underlying inflation to return to the target range of 2–3% late in 2025 and approach the midpoint in 2026. This reflected a judgement that the economy’s capacity to meet demand was somewhat weaker than previously thought, evidenced by the persistence of inflation and ongoing strength in the labour market.
REMOVED: There is substantial uncertainty around these forecasts. Revisions to consumption and the saving rate in the most recent National Accounts, high unit labour costs and the persistence of inflation – particularly in the services sector – suggest there are upside risks to inflation. On the other hand, momentum in economic activity has been weak, as evidenced by slow growth in GDP, a rise in the unemployment rate and reports that many businesses are under pressure. And there is a risk that household consumption picks up more slowly than expected, resulting in continued subdued output growth and a noticeable deterioration in the labour market.
ADDED: Since then, GDP data for the June quarter have confirmed that growth has been weak. Earlier declines in real disposable incomes and the ongoing effect of restrictive financial conditions continue to weigh on consumption, particularly discretionary consumption. However, growth in aggregate consumer demand, which includes spending by temporary residents such as students and tourists, remained more resilient.
Wage pressures have eased somewhat but labour productivity is still only at 2016 levels, despite the pickup over the past year.
Broader indicators suggest that labour market conditions remain tight, despite some signs of gradual easing. Over the three months to August, employment grew on average by 0.3% per month. The unemployment rate remained at 4.2% in August, up from the trough of 3.5% in mid-2023. But the participation rate remains at record highs, vacancies remain elevated and average hours worked have stabilised. Taken together, the latest data do not change the Board’s assessment at the August meeting that policy is currently restrictive and working broadly as anticipated. But there are uncertainties. The central projection is for household consumption growth to pick up in the second half of the year as the headwinds to income growth recede – but there is a risk that this pickup is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market.
More broadly, there are uncertainties regarding the lags in the effects of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand, and while conditions in the labour market remain tight.
There also remains a high level of uncertainty about the outlook abroad. Some central banks have eased policy, although they note that they are removing only some restrictiveness and remain alert to risks on both sides, namely weaker labour markets and stronger inflation. The outlook for the Chinese economy has softened and this has been reflected in commodity prices. Geopolitical uncertainties remain pronounced.
Returning inflation to target is the priority.
Sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment. To date, longer term inflation expectations have been consistent with the inflation target and it is important that this remain the case.
While headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high. The most recent projections in the August SMP show that it will be some time yet before inflation is sustainably in the target range. Data since then have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range.
The Board will continue to rely upon the data and the evolving assessment of risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.
Conclusions
Subtle but important is how I would describe the changes between the September and August statements. The RBA appears to have gained greater certainty from recent data with respect to both the economic and inflationary pictures:
REMOVED: “The economic outlook is uncertain and recent data have demonstrated that the process of returning inflation to target has been slow and bumpy.”
The addition of phrases relating to a stronger labour market, along with the removal of phrases relating to pressures on business, as well as for the first time a reference to “spending by temporary residents such as students and tourists”, suggest a view the Australian economy is tracking slightly more strongly than the RBA previously thought – albeit with the prospect of a still-weak consumer.
On inflation, which arguably the RBA is more concerned about right now than economic growth, perhaps the key change was the omission of the phase: “high unit labour costs and the persistence of inflation – particularly in the services sector – suggest there are upside risks to inflation.”
Do we then take the removal of the two phases “the process of returning inflation to target has been slow and bumpy”, and “there are upside risks to inflation” as a sign the RBA feels it has the inflation issue more in hand? Add to this the new text on at least a temporary relief in some inflationary pressures from government support.
If it is the case the RBA feels the economy appears to be on a reasonably firm footing (albeit with continued risks), and given RBA policy remains “restrictive”, and with inflation potentially under greater control…then the possibility of further rate hikes should then now be off the table.
Let’s assume that one, and this is indeed good news for mortgage holders. However, I suggest its also clear from the September statement that the first rate cut is still not yet on the horizon.
This article first appeared on Market Index on 24 September 2024.
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Carl has over 30-years investing experience and has helped investors navigate several bull and bear markets over this time. He is a well respected markets commentator who specialises in how the global macro impacts Australian and US equities. Carl has a passion for technical analysis and has taught his unique brand of price-action trend following to thousands of Aussie investors.
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Carl has over 30-years investing experience and has helped investors navigate several bull and bear markets over this time. He is a well respected markets commentator who specialises in how the global macro impacts Australian and US equities. Carl...
Carl has over 30-years investing experience and has helped investors navigate several bull and bear markets over this time. He is a well respected markets commentator who specialises in how the global macro impacts Australian and US equities. Carl...
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