The Reserve has now held the cash rate steady since November 2023 and refrained from dropping hawkish language, such as Bullock’s oft-used “not ruling anything in or out” phrase, despite peer central banks beginning to ease and y/y inflation numbers declining.
“The reason I say we're not 'ruling anything in or out' is we do think that there are still some risks on the upside,” she argued. “The underlying inflation that we're experiencing is still sitting at around about 5% for services. That's still a significant amount of inflation in the system, suggesting that demand is still above supply… and we still have a labour market which looks on the tight side.”
The futures markets have pared back chances of a February cut to 27.6% from about 33% last Friday with a full 25bp cut now not priced in until May. While the decision was anticipated, many had expected the Reserve to start tapering its hawkish tone in anticipation of 2025 cuts. (See MNI RBA WATCH: Board To Hold, Could Signal Shift In Stance)
BALANCED RISKS
While stressing the upside potential for inflation, Bullock noted the Reserve considered the risks balanced. “We see risks on both sides. We're not as restrictive. We didn't go as restrictive as many of these other central banks and those that are easing now are still keeping a bit of restrictiveness.”
While a rate cut was not discussed, Bullock repeated her message from September that the board had considered what it needed to see to warrant an adjustment to its strategy, pointing to weak consumption on the downside, or poor productivity on the upside.
Bullock considers the RBA’s strategy successful, pointing to the 4.1% unemployment rate. “So far, I think we're still on that [narrow] path,” she added.
UPDATED FORECASTS
The Reserve’s updated Statement on Monetary Policy, also released today, showed a slight downward adjustment to its projection for trimmed-mean inflation, the RBA’s preferred measure, with the metric at 3% by Q2 2025, 10bp better than in August’s forecasts. Its market-driven cash rate assumption, however, was 10bp higher for the same quarter to 4.1%, while peak unemployment also edged up 10bp to 4.5% by Q4 2025.
While the governor would not offer guidance, she said the board would assess information as it comes, including forward-looking indicators, and “we will try to make sure that we're tuned in enough that if things start to turn down more than expected, that we're ready to act.”