A near-term reduction in the cash rate “doesn’t align with the board’s current thinking”, according to RBA governor Michele Bullock, who clarified risks remain in the economy and that the RBA board did, in fact, contemplate a rate rise in its latest meeting.
The RBA held rates at 4.35 per cent in August, in line with market expectations, following a softer-than-expected inflation print last week for the June quarter.
However, the RBA board is keeping a close eye on the data and is not ruling anything in or out, Bullock reiterated in her post-meeting press conference.
“If it does appear that inflation is not tracking the way we are forecasting, then [the board] will, if needed, will increase rates,” she said.
She pointed out overseas experience has demonstrated how “bumpy” inflation can be on the way down and across the economy, causing the central bank to remain cautious.
A rate rise “was a very serious consideration”, Bullock warned.
“There were only two things on the table – hold, and accepting that we might have to hold for some time, or raise – and I think the board felt that the risks associated with raising at this point, as opposed to holding where we are and just staying where we are, warranted the second alternative, which is what we did.”
The governor also touched upon market expectations of an interest rate cut by the end of 2024, as has been predicted by a number of market pundits to be November 2024.
However, the board is not inclined to pursue a rate cut in the “near term”, which she clarified to mean by the end of the year or the next six months.
“Given what the board knows at the moment and what the forecasts are, that doesn’t align with their thinking about interest rate reductions at the moment,” Bullock said.
Addressing questions from the media about the possibility of a recession, the RBA governor also emphasised the belief that Australia is “on that narrow path”.
“Having said that, we are data dependent, and there’s a number of things, as we mentioned in the statement of monetary policy, that could result in the economy slowing much more quickly, and inflation coming down much more quickly than we expect, and we’ll need to be alert to those,” Bullock said.
She continued: “If they come to pass, then yes, interest rate cuts would be on the agenda. But at the moment, given what we know, and the forecasts, [in] the near term, interest rate cuts are not on the agenda.”
Keeping an eye on volatile markets
Bullock confirmed the volatility of global financial markets in the last few days, which saw the ASX plunge around 3.7 per cent on 5 August to its worst two-day performance since 2022, was also discussed by the board in its latest meeting.
“In part, [the volatility] is reflecting the markets adjusting to economic news in a period when there’s already considerable uncertainty about the outlook, and we’ll be keeping an eye on this, as you’d expect,” she said.
She elaborated it did not play a role in the decision-making process, but it remains of interest and will be watched closely.
The trigger for the volatility, she said, came from a re-adjustment of market expectations following poor employment numbers in the US and a rise in interest rates in Japan.
“We had some briefings on that, it was really just to understand what’s going on and what were the reasons for it. I think there was a bit of a feeling it was a bit of an overreaction in some ways – it was one number – but it was a reassessment by some parts of market as to the US economy,” she said, clarifying the board assessed “how much of a signal” it should take from the events.
“I don’t think they took a lot from it, but they accepted they just need to keep an eye on it.”
Economists react
In its post-meeting statement, the RBA said the economic outlook is “uncertain” and recent data have demonstrated that the process of returning inflation to target has been slow and bumpy.
It clarified inflation in underlying terms remains too high, and the latest projections show that it will be some time yet before inflation is sustainably in the target range. With this, the RBA said policy will need to be “sufficiently restrictive” until the board can be confident that inflation is moving sustainably towards the target range.
Following the rate decision, Krishna Bhimavarapu, APAC economist at State Street Global Advisors, highlighted the RBA’s “dovish pivot” as it now foresees headline CPI declining to 3.0 per cent year-on-year by December 2024, down from 3.8 per cent.
“Most importantly, the bank now foresees [a] higher unemployment rate, also in line with the risks that we fear. The bank balanced these by nudging up the trimmed mean inflation,” Bhimavarapu said.
“The RBA also seems to be uninterested in cutting rates without any clear and substantial progress, as it assumed no cuts in their updated forecasts. We think the outcome is well balanced but, nonetheless, we maintain our forecast of the first rate cut in November this year with the same risks even after the meeting today.”
Betashares’ chief economist, David Bassanese, pointed out the bank “appears to retain at least a mild tightening bias”.
“Even if the US Federal Reserve cuts interest rates next month, the RBA is unlikely to follow at its next policy meeting in September – unless there is further extreme share market volatility and/or signs of a faster-than-expected decline in inflation,” Bassanese said.
He maintained the first rate cut will come in February next year, following the December quarter CPI report on 29 January, “which I anticipate will show annual trimmed mean inflation slowing to 3.25 per cent, or a bit lower than the RBA’s latest forecast of 3.5 per cent”.
Emma Lawson, fixed interest strategist at Janus Henderson, echoed the sentiment that the RBA is unlikely to begin an easing cycle before Q1 2025.
“The outlook remains complex, amid a myriad of competing pressures in the economy and from geopolitical and structural pressures. The Australian economy is slowing gently, and while no recession is forecast, the pressure of higher interest rates is expected to continue to broaden out across sectors of the economy,” she said.
“Inflation remains high and is moderating slowly. The RBA needs to balance these risks along their so-called narrow path. An extended period of policy at restrictive levels will further slow growth, rebalance the labour market and subdue inflation.”
The global economic backdrop is slowing, she observed, but a growing number of geopolitical and structural concerns, such as elections and government debt concerns, raise market volatility risks.
“Our base case is for the RBA to remain on hold at current rates before commencing an easing cycle in Q1 2025. We price a more modest than the historically average easing cycle, of around 175 bps, spread over an extended period,” Lawson said.
