MNI POLICY: RBA's Fresh Forecasts Embed Strong Rates Profile

The Reserve Bank of Australia’s November Statement on Monetary Policy is consistent with a more aggressive rates stance, MNI understands, despite speculation by some former staffers that pushing back the expected return to the 2-3% inflation target band by six months to December 2025 signals a dovish shift.

The RBA upgraded its short-term inflation outlook within the November statement compared to its August forecasts and downgraded its peak unemployment call 25bp to 4.25% by December 2024, following the board's decision to hike the cash rate 25bp to 4.35% earlier this month. Together with the removal of language signalling possible “further tightening”, former staffers detected an overall dovish shift in the November statement, but the RBA believes the market should not place significant weight on its forecasts out to 2025 and consider the changed forecasts internally consistent with the potential for further hikes should economic metrics continue to print stronger, MNI understands.

The statement came after an upside surprise to CPI. GDP also grew 0.4% over Q2, beating the forecasted 0.3%, while unemployment has proved stubborn at 3.7% over October, with an above-average 55,000 jobs created. (See MNI: RBA Higher-For-Longer Shift Follows CPI Surprise-Ex Staff)

TRANSIENT IMMIGRATION

Helping to drive demand was a jump in Australia’s working age population by 2.8% y/y to September, the strongest rate of growth on record driven largely by strong net overseas migration. But, while the RBA considers that high immigration has had sector-specific impacts, such as on the rental market, it expects the effect to dissipate over 2024 as levels return to normal.

The RBA assumes year-ended population growth to have peaked in Q3 at about 2.5%, and that this should start falling back to the pre-pandemic average of circa 1.5%. In its judgement, new arrivals not only add to demand but also alleviate labour shortages, making the net effect on unemployment and aggregate inflation negligible, while immigration has played a positive role expanding the Australian economy over the long term.

The housing market has also experienced pandemic-related changes that have shrunk household sizes and played a more significant role elevating rental costs, the RBA believes.

The RBA board will watch closely the recent Wage Price Index data print, Labour Force Statistics and the monthly CPI, Due Nov 29, ahead of its Dec 5 meeting. Several ex-staffers have told MNI the RBA could raise the cash rate at both the December and February meetings.