MNI RBA WATCH: Board Set To Hold On Light Data

The Reserve Bank of Australia board is likely to hold the cash rate at 4.35% when it meets next week and delivers its decision on March 19, as the economy continues to slow and demand falls as expected.

The RBA looks set to achieve its so called “narrow path” as unemployment increases in line with forecasts, job creation falls and inflation softens. Ex staffers have told MNI the RBA’s next move will likely be a cut, though debate surrounds the timing, with most expecting a late 2024 reduction at the earliest. (See MNI: RBA To Hold Rates Despite Soft Data - Ex Staff) A pause would be the board’s fourth consecutive hold. It last hiked the cash rate 25 basis points in November 2023.

Australian dollar overnight index swaps markets have priced in a little chance of a move next week, however traders expect a 25bp cut by the Aug 5-6 meeting.

WEAK GDP

While a lack of clear economic data has characterised the period since the board last met, weak GDP growth – the economy grew 0.2% over Q4 – shows demand falling and the economy slowing in line with the cash rate’s restrictive level.

While GDP per capita improved 20 basis points to -0.3% q/q, the measure remained negative for a third consecutive quarter, while the household savings-to-income ratio rose to 3.2% q/q from 1.9% after eight consecutive quarterly falls. GDP per hour worked, a measure of productivity – a key focus for the Reserve Bank of Australia – also declined 50bp to 0.5%, however this was likely driven by a rise in unemployment. (See MNI POLICY: RBA Relief As Productivity Weakness Unwinds)

LABOUR AND CPI RESULTS

Unemployment rose 10bp faster than expected in January to 4.1% from December’s 3.9% and created jobs printed at 500, significantly below the market’s 25,000 expectation, indicating the labour market could soften faster than the RBA expects. The Reserve’s forecasts see unemployment peaking at 4.4% by June 2025 as inflation reaches 3.1%, close to its 2-3% target band.

The monthly CPI indicator remained flat over the month at 3.4%, however, printed 20bp lower than the market estimate.

The Reserve will likely focus heavily on the rental component of the indicator, which remained unchanged at 7.4%, a leading driver of non-tradable inflation and headline CPI. The RBA will also likely focus on the next monthly print due March 27, however, it will lack any insight on services inflation until the next quarterly print due April 24. The RBA has recently voiced concerns over sticky services inflation.

NEXT MOVE DOWN

Ex staffers agree the next move from the RBA will likely be a cut, despite the Reserve's more hawkish language. While goods price falls will continue to add pressure on headline CPI, the majority of former staffers believe the RBA will hold the cash rate at elevated levels for some time, with most not expecting a reduction until late 2024 or early 2025, primarily due to sticky services inflation and the Reserve’s desire to keep a tight rein on expectations.

Governor Michele Bullock will detail the board’s decision at a press conference directly after the decision.