MNI RBA WATCH: Board Holds, Shrugs Off Market Volatility

Reserve Bank of Australia Governor Michele Bullock pushed back against market assumptions of a near-term rate cut, noting the Board would hold firm until it gained greater certainty that underlying inflation is falling towards the 2-3% target and downplaying this week's financial market volatility.

“A near-term reduction in the cash rate doesn't align with the Board's current thinking," she told reporters following the decision on Tuesday to hold the cash rate at 4.35%. "We've seen from overseas experience how bumpy inflation can be on the way down and across the economy. We need to see demand and supply coming back into better balance.”

Overnight index swaps market pricing, which had shifted recently on unexpectedly lower Q2 CPI figures, was 4-7 basis points firmer after the decision across meetings, but with a cumulative 27bp of easing priced in by year-end, 6bp more than that noted last Friday. (See MNI RBA WATCH: Board To Hold, Await Further Inflation Insight)

The Board has held the cash rate steady since November 2023.

NEAR-TERM MISS

The RBA's updated Statement on Monetary Policy, which detailed adjustments to its forecasts, illustrated the Bank's concern over persistently high inflation.

The RBA expects headline inflation to fall 80 basis points to 3.0% by the December quarter, but this will be driven by temporary government measures aimed at the energy sector, with the metric climbing back 70bp by Q4 2025. Trimmed-mean inflation – the more important and less volatile gauge – will rise 10bp by December to 3.5% over May’s forecasts before reaching 2.9% by Q4 2025, also 10bp higher than the last set of predictions.

Bullock stressed that the Board had seriously considered a hike. “There were only two options on the table, hold... or raise. The Board felt that the risks associated with raising ... warranted the second alternative."

The RBA still foresaw the return of CPI to the mid-point of its target range by Q4 2026 within its updated forecasts. While Bullock pushed back against any notion of a red line that would force its hand in future should it push this timeline out further, she added difficult decisions will be needed should inflation fail to track back to the top of the band by the end of 2025.

OUTLOOK UNCERTAINTY

Bullock noted unit labour costs and productivity remained a key concern. She also warned services inflation remains high even in some countries that had begun decreasing rates.

"Inflation around the world in terms of services is bumpy, and it's going up in some countries again," she commented, adding that it was averaging about 5-6% in major economies.

She shrugged off this week’s financial market volatility, adding that its unlikely to affect inflationary pressures in Australia. The moves were due largely to portfolio adjustments driven by the yen carry trade and investors realigning their expectations following a significant equity market rally in the U.S., she said, adding the situation played no part in the board's decision.

The board next meets Sept 23-24.