MNI RBA WATCH: RBA Bases Forecasts On 3.9% Cash Rate By Dec

The Reserve Bank of Australia’s updated Statement on Monetary Policy assumes the cash rate will fall to 3.9% by the end of the year from its current 4.35% level, despite the Board maintaining a more hawkish tone and the governor’s message that assumptions can change.

The cash rate assumption represents a new addition to the statement published every three months, which also now includes updated sections on the labour market and the bank’s balance sheet among others.

“We need some sort of assumption, but I emphasise the word 'assumption,' it isn't a commitment, it isn't a forecast, isn't even an expectation, it is something to work with," Governor Michele Bullock told the media following Tuesday's cash rate decision, which saw the Board leave the rate unchanged. The decision was largely anticipated. (See MNI RBA WATCH: Board Likely To Hold Cash Rate At 4.35%)

Bullock stressed the wider public should not consider the RBA’s cash-rate assumptions as set. "As we move out with our forecast, it gets more uncertain. If the risks on the downside present themselves, then we have the option of cutting interest rates. If the risks on the upside eventuate, then we might have to look at whether or not we need to increase again."

The market had priced in at least two 25bp cash rate cuts prior to today’s decision with the first occurring at the June 17-18 meeting. RBA-dated OIS pricing was 1-4bp firmer across dates after the decision. (See Cheaper, RBA Leaves Policy Unchanged, Doesn't Rule Out More Hikes)

Bullock noted the current level of the cash rate was restrictive enough to pull inflation back to target, but added the Board would continue to rely on data and would not "rule anything in or out."

"There is a risk that inflation expectations will drift further, so that's obviously a risk we're concerned about, because it would be costly to address." Recent weakness within household consumption, however, was concerning and could continue longer than expected, particularly if offshore growth weakens, she added.

GREATER TRANSPARENCY

MNI has reported the RBA’s updated agreement with the federal treasurer and the government’s updated white paper could drive greater transparency over how the Reserve calculates its key variables, such as the neutral rate and the Non-Accelerating Inflation Rate of Unemployment (NAIRU). (See MNI: Updated RBA Goals To Push Hawkish Stance - Ex Officials)

Bullock, however, pushed back, noting that to focus on individual specific numbers that were challenging to calculate could be counterproductive.

The Reserve slightly adjusted its unemployment forecast to 4.4% by Q4 from the previous 4.25% assumption.

Bullock said that 4.4% did not equate to the NAIRU, adding that the Bank had an idea of where employment and unemployment were needed to ensure inflation remained low and stable. "That's what delivers full employment in our language and that's what we think of as we only know that by looking at the financial and economic indicators around it." She added tightness remained in the labour market and some pockets of strong wage growth existed.

FRESH FORMAT

The governor's post-decision media conference was the first of its kind and followed the Board's new two-day format. The meeting was also the first to feature a Board vote, which it will in future make public, likely when it debuts the separate monetary policy committee staffed by more macroeconomists later in the year.

Bullock will likely detail the Board’s decision further when she faces the House of Representatives Standing Committee on Economics on Feb 9.