The Reserve Bank of Australia (RBA) believes there is “sufficient value” in waiting for more data in the new year as the bank seeks to assess how the “balance of risks” evolves.
In the RBA’s final meeting minutes of 2023 published on Tuesday, board members stressed that “encouraging signs” of progress towards the bank’s objectives needs to continue.
While limited economic data was released between the RBA’s November and December meetings, the board said these indicators were broadly in line with expectations.
“Inflation had continued to decline but remained high,” the meeting minutes read.
“Wages growth had reached 4 per cent a little sooner than had been expected but the staff judged that wages growth was unlikely to rise much further. Output growth had continued below trend and the labour market was tight but easing gradually.”
Once again, board members considered whether to raise the cash rate target by a further 25 basis points, as they did in November, or hold the cash rate steady.
The case to hike was centred around observations that inflation will remain above target for a prolonged period and the risks that this period may drag out for longer than expected.
“Members noted that inflation was increasingly being driven by domestic demand. They also observed that underlying inflation was higher in Australia than in several other countries,” the minutes noted.
“Furthermore, domestic demand was judged still to be running above the level consistent with the inflation target and growth could be supported in the year ahead by a recovery in real household disposable income as inflation declined.
“Members noted that the staff’s most recent forecasts, which were predicated on a lift in productivity growth, would see inflation return to the top of the target band by the end of 2025, rather than the midpoint of the band.”
Meanwhile, the case to hold reflected the view that data received over the previous month did not warrant a material revision to the outlook and that there is the possibility of a larger rise in unemployment than previously anticipated by the RBA.
“Members observed that monetary policy was working to bring aggregate demand and supply into closer alignment,” the minutes said.
“They noted that the risk that it takes longer than expected to return inflation to target was balanced by the risk that aggregate demand slows more quickly than anticipated.”
After weighing up both options, board members agreed that the case to leave the cash rate target unchanged at this meeting was stronger.
“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend on how the incoming data alter the economic outlook and the evolving assessment of risks,” the board said.
“In making its decisions, the board will continue to pay close attention to developments in the global economy, 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.”
Commonwealth Bank head of Australian economics Gareth Aird pointed out that the meeting minutes mark the last scheduled piece of communication from the RBA until its next board meeting in February 2024.
“As such, the minutes were the last opportunity the RBA had to guide the market ahead of the first board meeting next year,” he said.
“The minutes did not make any observations in our view that shift the near-term outlook for policy. The Q4 23 CPI, to be published on 31 January, will make or break the case for the RBA to hike the cash rate again in February 2024.”
Under changes recommended by the RBA review, Mr Aird noted that the RBA’s meeting schedule will move to every six weeks in 2024.
“But more importantly for the outlook for policy will be the establishment of a new monetary policy board and the disclosure of unattributed votes. The new monetary policy board is likely to commence from July next year,” he added.
According to Mr Aird, the RBA will continue with their inflation fighting rhetoric for some time.
“But against the backdrop of rising unemployment and falling GDP per capita, the board will be quite reluctant to tighten policy further. Indeed, the need for further rate rises has dissipated,” he argued.
“Our base case is unchanged. While the near-term risk sits with another 25 bp rate hike at the February board meeting, we see the RBA on hold. We continue to expect an easing cycle commencing in September 2024. We have 75 bp of rate cuts in our profile in late 2024 and a further 75 bp of easing in H1 25, which would take the cash rate to 2.85 per cent.”
Following the release of the December meeting minutes, ANZ also indicated that its views on the RBA remain unchanged. The bank’s head of Australian economics, Adam Boyton, stated: “We think the cash rate has peaked at 4.35 per cent”.
“We expect the RBA will retain a tightening bias over the first half of 2024. Rate cuts remain some distance off (we see the first easing in November 2024), with tax cuts (from 1 July 2024) and a likely additional discretionary fiscal easing to come first.”
