The Reserve Bank (RBA) left rates at 4.35 per cent for the seventh consecutive time on Tuesday, outlining that its top priority is to sustainably return inflation to target while maintaining price stability and full employment.
While governor Michele Bullock maintained that the central bank is still grappling with “sticky” inflation, she conceded that the board did not “explicitly consider” a rate hike.
“We didn’t explicitly consider an interest rate rise at this meeting,” she said.
“The format of the meeting was slightly different. The way we framed the discussion really was around what had changed since August.”
But the governor did underline that current projections indicate that it will take time before inflation falls within the target range.
As such, Bullock stressed: “The message clearly from the board is that in the near term it does not see interest rate cuts”.
Bullock seemed to adopt a more diplomatic tone during Tuesday’s press conference, expressing concern that her remarks could be misinterpreted in the current political climate.
When asked about Wayne Swan’s recent allegations against her and the bank, Bullock replied, “I’ll stay out of the politics of it”.
“My only comment would be that what we are doing is what we think is best to maintain this narrow path of bringing inflation back down, because it is still too high,” the governor said.
Earlier this month, the former treasurer accused the RBA of prioritising rigid economic principles over practical decision making.
“I think the Reserve Bank is putting economic dogma over rational economic decision making,” Swan said, adding that while the government is focused on tackling inflation, the RBA is “punching itself in the face”.
Bullock also declined to comment on whether she believes the central bank’s independence has been threatened in recent weeks.
“I’m not focused on what other people are saying about me or the board,” she said.
Bullock instead emphasised that the central bank remains focused on data and its evolving risk assessment to guide decisions. Key among this data is Wednesday’s consumer price print, which she expects to show the effects of the government’s cost-of-living relief measures.
“We will expect to see the cost-of-living relief come into play,” Bullock said, adding that headline inflation could fall below 3 per cent. “That is important because it is reflecting cost-of-living relief, but it is not really reflective of the underlying inflation pulse.”
The real issue, Bullock noted, is services inflation, which she described as the “crux of the matter”. “What that reflects is that demand is still a little bit above supply.”
Reflecting on the US Fed’s decision to implement a significant rate cut in September, Bullock emphasised that the US economy, along with others around the world, faces a completely different situation.
“The other point I would make is that most of those countries had official interest rates up around 5 or above 5 per cent, we look at how restrictive some of those countries are relative to us,” Bullock said. “We’re restrictive, but we think they’re restrictive than us.”
When asked about the decision not to raise rates more aggressively or earlier like the US, the governor said the RBA did not want to “smash the economy” – something the Treasurer has recently accused the bank of doing.
“We’ve chosen a strategy to get into restrictive territory, see if we can bring inflation down by bringing demand down to supply without actually moving into a negative output gap,” she said.
Economists, politicians divided on next steps
While economists remain split on the ideal strategy for the future, Treasurer Jim Chalmers provided an interesting take on the RBA’s latest decision on Tuesday, suggesting that the lack of rate hikes indicates a positive shift in the fight against inflation.
“The governor and the Reserve Bank board have noted today the very substantial progress that Australia has made when it comes to getting on top of this inflation challenge,” Chalmers said.
In stark contrast, shadow treasurer Angus Taylor painted a far grimmer picture, arguing that Australia is lagging behind in the fight against inflation and falling to the back of the pack.
“Australia is at the back of the pack in bringing down interest rates. Our core inflation hasn’t come down since January this year,” Taylor said, accusing Labor of “completely” failing to “fight and beat its homegrown inflation”.
“We expect the RBA will commence an easing cycle before it declares we have hit full employment given policy is currently restrictive – waiting until the destination is reached before normalising the cash rate means unemployment will rise by more than is both necessary and desired,” Aird said.
“We continue to look for 125 bp of RBA easing by end-2025 that would take the cash rate to 3.10 per cent.”
Krishna Bhimavarapu, APAC economist at State Street Global Advisors, challenged the RBA’s latest decision, labelling the central bank as “the hawkish outlier” in the current economic landscape.
“It is important to remember that early birds get most of the worms and countries recalibrating their rates will likely revive their economies faster,” Bhimavarapu said.
Others were more forgiving, concluding that the RBA is responding appropriately to inflation, which, most said, continues to hover uncomfortably high above its target.
“Put simply, the RBA will continue to sit on its hands and with only two more meetings in 2024, it is conceivable that rates remain on hold for the rest of the year with a potential ease coming early in 2025 should trends prove supportive,” said Dwyfor Evans, head of APAC Macro Strategy at State Street Global Markets.
VanEck’s head of investments and capital markets, Russel Chesler, maintained that it is “highly unlikely” that there will be any rate cuts until well into 2025.
“The markets are pricing in cuts to start by February 2025, but we do not believe this is likely. Many data points still indicate strength in the economy and persistent inflationary pressure,” Chesler said.
Like him, HSBC’s Paul Bloxham said: “Our central case is that the RBA does not cut until Q2 2025”.
“However, we see some risk it could take even longer than that. It is also plausible scenario that the RBA misses the easing phase altogether.”
