MNI POLICY: Competing Data Behind Recent Close RBA Calls

MNI (MELBOURNE) - Recent Reserve Bank of Australia policy decisions were incredibly close calls, with data often telling competing narratives, forcing officials to present finely balanced views to the board to ensure risks on both sides were understood as uncertainty around the direction of policy remains high, MNI understands.

The need for the balanced view partly drove the changed outlook on excess demand and the labour market in the RBA's August Statement on Monetary Policy, following its latest decision to hold rates at 4.35%, which noted that tighter conditions than expected led to higher inflation than previous estimates could explain. (See MNI RBA WATCH: Board Holds, Shrugs Off Market Volatility)

While the changed outlook was driven by slight adjustments to its inflation and labour predictions, and the general uncertainty around its outlook, it did not represent a dramatic shift in the RBA's thinking. 

The board's recent close decisions contrast significantly with the clear cut choices from the second half of 2022, when the direction of policy was more straightforward, with data laying a solid foundation for each interest-rate move.

The Bank is also making more of an effort at transparency following recommendations stemming from last year's RBA Review, another factor for the inclusion of the excess capacity concerns within the August statement.

LOWER INFLATION DRIVERS

The RBA is not anticipating significant further disinflation among goods prices, despite lower import prices due to China’s weakening economy, with services and rents the key drivers of anticipated slower inflation ahead, MNI understands.

While the RBA sees weak Chinese demand filtering through to lower import prices in Australia, it does not expect the effect to offset the broader international trend. Goods-price falls have in all likelihood found their floor as COVID disruptions to supply chains have normalised. 

Services and rents, which have proved to be sticky over the last 12 months, are expected to continue to moderate and contribute to lower inflation. House rents in particular have recently begun to show signs of a slowing in their growth pace which will continue to normalise, but this will take some time to show in the aggregate headline inflation read. 

Policymakers expect headline inflation to fall back to the midpoint target by end-2026. 

FED FOCUS

While a September U.S. Federal Reserve rate cut is likely to strengthen the Australian dollar against the greenback and put downward pressure on inflation, the RBA is also watching how lower interest rates globally impact equity markets, which could also feed into local financial conditions. 

Stronger global equity markets would support local activity and boost the economy, which would put some upward pressure on domestic inflation and possibly make the RBA's job harder.