The Reserve Bank of Australia (RBA) has left the cash rate unchanged at 4.35 per cent following its final board meeting for 2023.
Economists and the market were widely in agreement that the central bank would remain on hold in December, with many viewing February 2024 as the next potential opportunity for a move once the next quarterly inflation figures and other key data has been released.
The RBA’s last move – a 25 basis point hike in November – came after an upside surprise in the September quarter consumer price index (CPI), with the bank indicating a “low tolerance” for evidence of slower progress to its 2 to 3 per cent inflation target.
However, the latest monthly CPI indicator published late last month showed that inflation cooled from 5.6 per cent in September to 4.9 per cent in October, which some economists have interpreted as showing that inflation is now tracking below the RBA’s forecasts.
Ahead of Tuesday’s rate decision, Westpac chief economist and former RBA assistant governor (economic) Luci Ellis assessed that a hike in December was “unlikely”.
“Not enough new information has come to hand since [November] to warrant delivering a second increase just yet. The monthly CPI indicator is volatile, but the October reading was a bit below expectations,” she said.
“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.”
According to Ms Ellis, the RBA’s February 2024 meeting is “still live”. By then, the central bank will be able to refer to the December quarter CPI, the September quarter national accounts, and other data releases in making its first decision of the new year.
“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,” she continued.
“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.”
Scott Solomon, co-portfolio manager of the T. Rowe Price Dynamic Global Bond Strategy, similarly predicted that a December hike was “very unlikely” ahead of Tuesday’s meeting.
“While the cool October inflation print was very welcome by the board, caution is required before putting too much trust behind the monthly releases,” he said.
Mr Solomon said that the RBA is expected to maintain a hawkish tilt with a focus on two main themes heading into 2024.
“The first is migration, which has obvious consequences both to the labour market and housing market,” he explained.
“The second is global impacts of two factors: 1) Does the recent significant easing of financial conditions engineered by the US Fed have significant expansionary impact to the global economy as a whole; and 2) Is China fully committed to additional stimulus.
“For these reasons, we remain vigilant of the potential for further RBA hikes.”
Dr Oliver suggested that recent comments by RBA governor Michele Bullock “lacked the sense of urgency to raise rates that her comments prior to the November meeting had”.
“Since the last meeting, we have seen a slight rise in unemployment, softer retail sales, lower-than-expected inflation, and a slowing in national home price growth with some cities seeing price falls. So there is ‘no smoking gun’ to justify another rate hike on Tuesday.”
He also noted that the RBA would be cautious about reading too much into the October monthly CPI.
“Our base case is no change in rates on Tuesday and that the cash rate has peaked ahead of rate cuts in the second half of next year,” he stated.
“That said, the risk of another rate hike – which would most likely be at the next meeting in February if it occurs – remains high at around 40 per cent.”
A rate hike, Dr Oliver warned, would act as “overkill”, but key areas to watch will be the December quarter CPI in late January and the next two rounds of jobs and retail sales data.
According to Ms Bullock, inflation will remain the “crucial challenge” for the economy over the next “one to two years”.
