Guidance Tweak Gives Dovish Feel, Formailising No Pre-Set Path Idea

The RBA’s formal acknowledgement that it is not on a pre-set path when it comes to the further normalisation of monetary policy (via introducing the phrase to its guidance paragraph) has been viewed in a dovish light. Note this is a point that Governor Lowe has highlighted previously, although the formal inclusion in the statement may be seen as a sign that the RBA could be willing to slow the pace of tightening/pause relatively soon.

• The Bank expects headline CPI to peak in Q422, which it had previously noted, with a projection of 7.75% now pencilled in (prev. ~5.9%), matching the government’s peak inflation forecast. After that, inflation is expected to tail off to a little above 4% in ’23 (prev. 3.1%) and then ~3% in ’24. The Bank also highlighted the focus it has on anchoring inflation expectations, a point it has stressed on several occasions in recent weeks.
• GDP expectations were also marked lower, moving to 3.25% in ’22 (prev. 4.2%) before falling back to 1.75% in ’23 (prev. 2.0%) and ’24.
• It wouldn’t be drawn on the short-term specific point forecasts when it came to the text of today’s statement (that will come in Friday’s SoMP) but noted that it expects the “a further decline in unemployment is expected over the months ahead. Beyond that, some increase in unemployment is expected as economic growth slows. The Bank's central forecast is for the unemployment rate to be around 4 per cent at the end of 2024.” A reminder that the RBA has underestimated the strength of the labour market post-pandemic, leaving it behind the curve.
• Household spending continues to be a major point of uncertainty and the Bank has added the move lower in consumer confidence as a factor under its consideration. Still, it seems to place some faith in the strength of the labour market, financial buffers and saving rates, while conceding that inflation and higher interest rates are pressuring households (largely maintaining the tone of the July statement). This will be a key dynamic to watch in the months ahead and will be a key variable when it comes to shaping the terminal rate of the current hiking cycle.