MNI RBA WATCH: Bullock Stresses Data, Switches To Neutral Tone

The Reserve Bank of Australia softened language on a future rate hike, switching to a more neutral tone on its outlook on Tuesday after its meeting, though Governor Michele Bullock stressed data will drive future board decisions with all possibilities considered.

Speaking at a press conference following the decision to hold the cash rate at 4.35%, Bullock stressed the board would not “rule anything out.”

“The fact is that there are some downside risks, but there are also some upside risks,” she added. “We would love to get on the narrow path, but as we've said in the past, that does mean that inflation will have been outside of target for over four years and if there looks to be risk that it is going to be extended, I think we do need to be concerned about that.”

The RBA’s decision, which was largely anticipated, shifted Australian dollar overnight index swaps 3-7 basis points softer for late 2024 meetings. (See MNI RBA WATCH: Board Set To Hold On Light Data) The market now expects a cumulative 43bp of easing by year's end versus 36bp prior to the decision. The RBA has held the cash rate steady since it hiked 25bp in November.

DATA DEPENDENCY

Should data show inflation slowing faster than forecasted, “then we might need to think about interest rate cuts," Bullock said.

"But at the moment, we're in the position where I don't want to say either way, it's basically not ruling anything in, or ruling it out,” she added

The RBA’s forecasts show CPI inflation falling to 3.1% y/y – close to the bank’s 2-3% target band – by June 2025. The most recent CPI print showed prices rose by 4.1% y/y in Q4. The Australian Bureau of Statistics will publish the next monthly indicator on March 27 and the quarterly data on April 24.

NEUTRAL, NAIRU RATE

Recent GDP data showed growth continued its steady decline over Q4 to 0.2%, down from Q3’s 0.3% and Q2’s 0.5%, while per capita GDP remained negative for the third consecutive quarter at -0.3%.

Bullock noted growth remained too high. “Aggregate demand because of population growth has been elevated, so what we're observing now is aggregate demand is slowing and it's coming back more in line with supply and that's what you'd expect with restrictive monetary policy,” she said.

Monetary policy is slightly restrictive and above the neutral rate, Bullock said. “We think the signs are that it's in slightly restricted territory and as we hopefully observe inflation come down, that's when we start to have conversations about what is restrictive and how do we remove the restriction.”

The non-accelerating inflation rate of unemployment (NAIRU) was likely between 4-4.5%, Bullock said, but she stressed the Reserve could not decisively conclude the exact level. “All we can do is tread carefully,” she said. “We are prepared to act if we see the risks moving in one direction or the other."

The RBA will next meet May 6-7.