MNI RBA WATCH: Hikes Discussed, Governor Defends Credibility
Governor Michele Bullock has defended the Reserve's credibility following March's inflation uptick.
The Reserve Bank of Australia board discussed hiking at Tuesday’s meeting before delivering a further hold to the 4.35% the cash rate, Governor Michele Bullock told reporters.
The Board believes its stance is neutral, however, the costs should inflation keep rising were higher and the Reserve will act if necessary, Bullock said.
“On balance the Board felt at the moment staying where we are was appropriate," she added. "We think policy is currently restrictive. That doesn't rule out that we might have to raise rates but it doesn't mean we won't have to raise rates."
The Board has held the cash rate steady since November 2023.
Tuesday’s decision was largely anticipated, but the market reacted swiftly, with the Australia dollar falling to 0.6589 from 0.6629 against the greenback. Overnight index swaps markets have priced in about 10 basis points of easing by year-end from an expected terminal rate of 4.31%. (See MNI RBA WATCH: Board To Hold, But Mull Shift From Neutral)
CREDABILITY QUESTIONED
Bullock stressed the Reserve's credibility remains an important factor and inflation expectations must remain contained if it is to achieve its goal of pulling price growth back to its 2-3% target band, even as the RBA aims to “look through” more volatile price rises. “One thing I would highlight though, is that the forecasts now don't look a hell of a lot different than the November [2023] forecast when we increased interest rates,” she added.
The RBA also released its updated Statement on Monetary Policy, refreshing several key assumptions from February.
While it still expects CPI to return to its 2.5% mid-band target by June 2026, it believes the path there will be a more elevated one, with headline inflation at 3.8% over the next two quarters, up from February’s predictions for 3.3% by Q2 and 3.3% in Q3. Its trimmed-mean CPI outlook is also slightly more elevated at 3.8% in Q2 and 3.4% in Q3, up from 3.6% and 3.1%.
The Reserve's end-of-year cash rate assumption, derived from market pricing, also increased from 3.9% to 4.4%.
INFLATION EXPECTATIONS
Bullock said November’s rate hike served as an insurance policy. “If the services inflation really, really gets stuck and gets stuck at a level which is inconsistent with our target band, then we're going to have to act,” she added.
There was no evidence of inflation expectations increasing, despite CPI printing above target for over four years, she said. The most recent data showed Australian CPI rising 3.6% y/y over Q1, with healthcare and education as key drivers. Other components had fell in line with lower consumer activity, Bullock added, noting inflation expectations in financial markets over the medium term had not increased.
“Yes, very short-term expectations for inflation rose due to the supply chain issues, but we are starting to see that coming off now and I think they are moderating," she added. "We see a lot of wage agreements that had a high number in the first year tapering off. That’s indicative of people believing inflation will come back down.”
The Board next meets June 17-18.