MNI RBA WATCH: RBA Hikes By 25bps, February Increase On Radar

The Reserve Bank of Australia could increase rates again in February before pausing after it failed to deliver the overtly dovish tweak to guidance some had expected as it hiked by 25bps to a 10-year high on Tuesday.

With two months until its Feb 7 meeting, the RBA afforded itself some policy flexibility by stating it remained data dependent and wasn't on a "preset course" as it raised rates to 3.1%, capping a run of eight consecutive hikes that have delivered 300bps of tightening since May. (See MNI RBA WATCH: Another 25bp Hike, Eyes On Guidance Tweaks) The RBA repeated recent guidance that it "expected" to increase rates over the period ahead.

A February hike is in focus given uncertainty around a potentially elevated print in the Q4 Consumer Price Index due one week before the meeting, and the possibility that 2025 forecasts set to be unveiled in the Statement on Monetary Policy due on Feb 10 could show inflation remaining above its 2-3% target range. There will also be two sets of jobs data and colour on the health of consumer spending over the Christmas and New Year period. A hike in March could be a possibility too given expected strong Wage Price Index data ahead of the March 7 meeting.

Overnight indexed swaps have not fully priced in a hike in February, though a peak rate of 3.6% is priced in for late 2023. At 3.1%, rates are already modestly restrictive compared to the Bank's estimated neutral rate of around 2.5%.

The Bank brushed off the slowdown in inflation to 6.9% y/y in October, from 7.3% in September, describing the rate as still "too high". The reference showed the Bank is paying attention to new monthly CPI data despite comments from Deputy Governor Michele Bullock in September that there "needs to be a little bit of water under the bridge" before they would be included in policy considerations. (See MNI BRIEF: RBA's Bullock Says Rates Not Restrictive Yet). The Bank maintained its forecast for a peak in inflation of around 8% before the end of the year.

GROWTH TO MODERATE

However, the statement offered a more cautious tone on the economic outlook as it acknowledged the "substantial" cumulative increase in rates since May. Growth was expected to "moderate" over 2023 as household consumption is sapped by higher rates and inflation, the bounce-back in services spending "runs its course" and the global economy slows. Household spending was "expected to slow over the period ahead", though the timing was uncertain. Another uncertainty was the outlook for the global economy, which was assessed to have "deteriorated".

The Bank's aim to keep the economy on an "even keel" was tempered by concerns that uncertainties could deliver "a range of potential scenarios". Governor Philip Lowe last week said "it's going to be pretty easy to be knocked off it." (See MNI BRIEF: Wary of 'New World' Of Variable Inflation - RBA Lowe). The RBA maintained its forecast for growth of around 1.5% for 2023 and 2024.

The absence of a dovish tweak sparked a rally in the Australia dollar, which rose from 0.6715 to a high of 0.6738. It last traded at 0.6714. (See FOREX : AUD Tops The Pile After No Overt Dovish Pivot From RBA)