MNI RBA WATCH: Board Likely To Hold Cash Rate At 4.35%

The Reserve Bank of Australia board will strongly consider holding the cash rate steady at 4.35% in its first board meeting of 2024 over Feb 5-6, as it maintains a cautious stance despite a faster-than-expected decline in inflation.

While Governor Michele Bullock struck a hawkish tone in late 2023, recent quarterly and monthly inflation reads show inflation falling fast, which will also prompt the RBA to revise its forecasts within February’s Statement on Monetary Policy due to be published alongside the cash-rate decision.

A pause would be the boards’ third consecutive hold. The Bank’s December decision resulted in traders swiftly repricing the probability of 2024 rate cuts. (See MNI RBA WATCH: Market Downgrades Further Hikes After Hold) The overnight index swaps market has now fully priced in a 25bp cut at the June 17-18 meeting and another at the Sept 23-24 session.

MISSED CPI

Quarterly CPI rose 4.1% y/y over Q4 2023 from Q3’s 5.4%, lower than the forecasted 4.3%, while trimmed mean rose 4.2% from the prior quarter’s 5.1%, data from the Australian Bureau of Statistics showed Wednesday. The RBA has forecasted CPI at 4% by the June quarter. The monthly indicator also continued to de-accelerate, printing at 3.4% y/y down from November’s 4.3%. Over the last three months, the underlying indicator’s growth rate has recorded below 2.3%, back within the RBA’s 2-3% target band, according to one former RBA economist. (See chart)

(Source: Isaac Gross, 2024)

Eased supply-side constraints, similar to overseas peer economies, have largely driven the fall in CPI. (See MNI INTERVIEW: RBA To Cut By June - Ex-staffer) However, domestic sources of inflation remain high and will continued to capture the RBA’s attention throughout 2024. While tradeables inflation fell to 0.7% q/q, or 1.5% y/y, non‑tradeables, which include services and rent, was 1.3% q/q, or 5.4% y/y. Government subsidies also softened the impact of rental inflation, meaning it could tick higher over Q1 as payments end.

DOMESTIC DEMAND

Early 2024 data shows household finances may suffer more than expected this year.

Australia’s unemployment rate held steady at 3.9% in December, however, those employed dropped by 65,100 – more than the expected 15,000 fall – indicating softness ahead for the labour market.

Spending has also moderated, with seasonally-adjusted retail turnover falling 2.7% in December, following November’s 1.6% decline, driven largely by weak discretionary spending. (See chart)

UPDATED FORECASTS

The latest CPI result could force the RBA to adjust when it expects to pull inflation back to its 2-3% target. The bank had expected this to occur by the end of 2025, however, some believe the RBA could pull this forward significantly.

Any revision would represent a sharp turnaround from November’s slate of forecasts, when the Bank pushed out its expectations for inflation's return to target. The updated forecasts will also extend out to mid-2026, giving the RBA the opportunity to illustrate when it expects to reach 2.5%, the mid-point of its band. (See MNI: Updated RBA Goals To Push Hawkish Stance - Ex Officials)

However, the RBA may still act cautiously. Its tone over the last six months has been decidedly hawkish and the Reserve may want to ensure inflation is truly under control before it adjusts its communications away from a tightening bias. The Bank’s new focus on the mid-band could also fuel a more hawkish stance, while it could place greater weight on domestic sources of inflation, such as rent, housing, services and immigration, which represent significant inflationary tailwinds.

Governor Bullock will likely detail the Board’s decision when she faces the House of Representatives Standing Committee on Economics on Feb 9.