The Reserve Bank of Australia (RBA) has kept interest rates on hold while retaining a tightening bias in its final monetary policy decision of the year.
In her post-meeting statement on Tuesday, RBA governor Michele Bullock once again confirmed that whether further tightening is required to ensure that inflation returns to target in a reasonable timeframe “will depend upon the data and the evolving assessment of risks”.
But she acknowledged that the “limited information” received on the domestic economy since the RBA’s last meeting in November was “broadly in line with expectations”.
“The monthly CPI indicator for October suggested that inflation is continuing to moderate, driven by the goods sector; the inflation update did not, however, provide much more information on services inflation,” Ms Bullock noted.
“Overall, measures of inflation expectations remain consistent with the inflation target.”
While wages growth picked up in the September quarter, Ms Bullock said this was expected since it captured a Fair Work Commission decision on award wages.
“Wages growth is not expected to increase much further and remains consistent with the inflation target, provided productivity growth picks up. Conditions in the labour market also continued to ease gradually, although they remain tight,” she added.
According to Ms Bullock, higher rates are helping establish a more sustainable balance between aggregate supply and demand in the Australian economy.
“The impact of the more recent rate rises, including last month’s, will continue to flow through the economy. High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment,” she stated.
“Holding the cash rate steady at this meeting will allow time to assess the impact of the increases in interest rates on demand, inflation, and the labour market.”
RBA maintains hiking bias, economists
According to AMP chief economist Shane Oliver, there is “no doubt” that the RBA once again considered whether to hike or hold in December before eventually opting to hold. In fact, Dr Oliver believes that the RBA’s bias towards another hike is once again present in its statement.
“There is no meeting in January but by the February meeting, the RBA will have December quarter inflation data, two more rounds of retail sales and jobs data and revised RBA forecasts – so all of these will be critical,” he said.
“Given its hawkish bias, our view is that the risk of another rate hike remains high at around 40 per cent – and if it occurs, it will be at the February meeting.”
Similarly, HSBC chief economist Paul Bloxham explained that the bank’s next decision will be made based on whether data remains in line with its forecasts.
“Our view is that, given the revisions the RBA made to its own forecasts in early November, it will be quite hard for them to be tangibly surprised to the upside relative to their own forecasts for underlying inflation or the jobs market,” he said.
“Our central case is that the cash rate will now be held steady at 4.35 per cent for some time.”
Whether inflation is declining fast enough to reach the 2 to 3 per cent target in 2025 will determine the RBA’s next move, Westpac’s chief economist and former RBA assistant governor Luci Ellis said.
“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,” she said.
“For this reason, the February meeting should still be considered ‘live’.”
However, Westpac is leaning towards the idea that the November rate hike was in fact the central bank’s last.
“It remains our view, though, that it is more likely than not that the RBA has reached the peak of its rate hiking cycle.”
Barclays is also of the view that the RBA’s hiking cycle is over but noted that, given the bank’s data-dependent approach, a hike remains a possibility if the December quarter inflation data comes in above expectations.
“Higher inflation forecasts, the increased risk of ‘inflation remaining higher for longer’, and the relatively better outlook for growth and unemployment suggest that the official cash rate will also be kept higher for longer,” the firm added.
Ultimately, the RBA governor said in the bank’s post meeting statement that “returning inflation to target within a reasonable timeframe remains the board’s priority”, leaving the door open for potential further rate hikes.
