MNI RBA WATCH: Market Downgrades Further Hikes After Hold
The RBA's widely-anticipated decision to hold was interpreted as dovish by the market.
The Reserve Bank of Australia board’s decision to hold the cash rate at 4.35% on Tuesday was widely anticipated, but the market response was swift, downgrading implied chances of further hikes in 2024.
While Governor Michele Bullock’s accompanying statement was little changed from November, when the RBA snapped a four-month pause with a 25bp hike, Australian dollar overnight index swaps fell 2-8bp across 2024 meetings (See chart). Commonwealth government bonds were also 4-6bp richer, while the Australian dollar fell to 0.6575 from 0.6605 against the U.S. dollar.
The RBA will usually hike consecutively before pausing to determine the impact on the economy.
While Bullock stressed a lack of data since the last meeting in her statement, the board will not have long to wait with Q3 GDP due on Wednesday. Economists expect growth to rise 0.1 percentage points to 0.5% q/q, but the RBA will likely focus on productivity and unit labour costs, which it believes are a key driver of inflation. (See MNI POLICY: RBA Soft Landing Banks On Productivity Improvement)
Bullock also noted October’s monthly CPI – which showed signs of moderation – did not contain data on services prices, which are only included in the second and third months of each quarter’s releases.
The RBA has stressed services inflation remains a main driver of domestic price rises as supply chains and offshore goods prices have normalised. The board will also have access to the less volatile quarterly CPI, due Jan 31, before it next meets between Feb 5-6.
Tuesday’s meeting was the last before the RBA implements significant change in 2024, which includes reducing the number of meetings each year to eight from 11, increasing their length and the depth of information provided to board members. Around the middle of next year the RBA will also hive off interest rate decisions to a monetary policy board, and will have its mandate reduced to focus on price stability and maximum sustainable employment.
Bullock will provide further detail on the board's decision when she speaks at an industry conference in Sydney on Dec 12.