The Reserve Bank of Australia (RBA) left the cash rate unchanged at 4.35 per cent on Tuesday.
Although the Reserve Bank’s post-meeting statement was largely unchanged, the central bank did make reference to the upside surprise in the first quarter CPI data and reiterated its commitment to ensuring that inflation returns to target in a “reasonable timeframe”.
Following Tuesday’s meeting, governor Michele Bullock struck a more hawkish tone than the RBA’s post-meeting note when speaking to the media, stating that the central bank is prepared to raise interest rates should inflation persist as a concern.
“Things are pretty bumpy,” Bullock said. “We might have to raise, we might not.”
She revealed that the board did debate a rate hike at its meeting, and on balance, felt that leaving rates where they are was most appropriate.
Although a hike is not the bank’s central forecast, Bullock reiterated that there are no guarantees and maintained the bank’s stance as “neutral”.
“We don’t think we necessarily have to tighten again, but if we have to, we will. If we really think inflation is going to be persistent and significantly above our forecast, we will tighten again.
“We must continue to be vigilant with the continued risk of high inflation,” Bullock said, reiterating that the bank is not “ruling anything in or out” and will be “data driven”.
The RBA updated its inflation forecast on Tuesday, predicting that headline inflation in the second quarter would reach 3.8 per cent, instead of the previously predicted 3.3 per cent.
Further out the RBA forecast headline inflation to be 3.8 per cent in Q4 24, before falling to 3.2 per cent in June, the RBA doesn’t expect inflation to hit its target range until December 2025, and anticipates it will be back around the midpoint of the target band by mid-2026.
The updated economic forecasts assume the cash rate remains around its current level until mid-2025 before declining to around 3.8 per cent by the middle of 2026.
Moreover, the RBA revised its forecast for GDP growth downwardly over 2024, but left it unchanged over the rest of the forecast horizon.
Touching on the economy’s resilience to date, Bullock told media the bank is trying not to tip the economy into recession.
“As I said, I think conditions are restrictive … and what we are really trying to do is slow things enough to bring inflation down without tipping the economy into recession.
“That’s what we’re trying to do.”
‘All options still in play’
Commenting on the bank’s May rate announcement, Dr Dwyfor Evans, head of APAC Macro Strategy at State Street Global Markets, said “all options are seemingly still in play”.
“Talk around another cash rate hike was largely borne of stubborn inflation pressures and this persists with the Reserve Bank raising its near-term inflation forecasts,” Evans said.
“However, remarks around a peak in wage growth and expectations on inflation moving back to target range – a longer process than previously anticipated – seems to open up a period of unchanged rates with no near-term appetite towards rate easing.”
Similarly, GSFM’s investment strategist, Stephen Miller, said the RBA board clearly believes that the prospect for any policy rate reduction in 2024 is, at this stage, “remote”.
“The patience of the RBA board is clearly being tested,” Miller said.
“I have previously expressed a view that monetary tightening is in indefinite abeyance and the next move in the policy rate is a cut. I still hold that view in anticipation of softer labour markets in the wake of weak activity growth, but the conviction levels attaching to that view are weak.
“Near-term indicators of inflation are critical. Should these reveal that the ‘stickiness’ in inflation continued into the current quarter, it may be that a further increase in the policy rate becomes a necessity.”
CBA’s Gareth Aird maintained the bank’s base case, which sees the cash rate gradually cut from November 2024 to reach 3.10 per cent at end-2025.
“The board did not reinstate its hiking bias and maintained the neutral stance it shifted to at the March board meeting, as we anticipated,” Aird said.
Taking note of the RBA’s revised inflation expectations, the economist said the CBA’s forecast profile is “broadly similar”.
AMP’s Shane Oliver didn’t quite agree with Aird, opining that the bank’s language was, in fact, “more hawkish”.
For Oliver, the statement and Bullock’s press conference comments both suggest the RBA “still retains some form of mild tightening bias in the near term”.
All up, he said, AMP continues to see the trend in inflation remaining down, ultimately helping to avert another rate hike and allowing the RBA to start cutting rates in November or December.
“However, the road to rate cuts will likely remain bumpy and while our base case is now for the first cut to come at year end, the risk of another rate hike in the near term is significant as is the risk of a further delay in rate cuts into next year,” Oliver said.
“Apart from inflation, the RBA will be looking closely at: whether next week’s budget adds extra stimulus into the economy for the next year or so; the impact of the 1 July tax cuts on consumer spending; and the size of the rise in minimum and award wages granted by the Fair Work Commission in its upcoming decision.”
