More Than One More Hike In The Pipeline

The RBA raised rates by 25bp as expected bringing the cash rate to 3.35%. Since the statement clearly stated that rates will need to rise further and more than once, it appears that the cash rate is likely to head towards 4% and if domestically-driven inflation isn’t contained possibly beyond.

• While the Board remains very concerned about households and sees global growth as “subdued” (improvement from “deteriorated” in December), the statement was clearly worried about the “higher than expected” inflation and “strong domestic demand adding to inflationary pressures”. Thus the guidance stated that “further increases in interest rates will be needed” and removed the “size and timing” phrase to say “how much further interest rates need to increase” – making it clear there is likely to more than one hike going forward.
• The RBA remains on a “narrow path” and with increased domestically-driven inflation and growing concerns around the consumer; it seems that path has become narrower. The “not on a pre-set course” phrase has been removed again, which may not be significant or it may reinforce the tone that rates have further to rise.
• From the references in the meeting statement, it seems that the RBA’s forecasts are broadly unchanged compared with the November Statement on Monetary Policy. Headline inflation looks like it won’t reach the top of the target band until 2025. The statement was vague though as to whether it will be in H1 2025 stating that it’s expected to be “around 3% by mid-2025”. It is worth noting that there was no mention of trimmed mean, so we will have to wait until Friday, but given Q4 was above the RBA’s forecast it is likely to be revised up.
• The RBA’s language changed slightly to sound more aware that domestic demand is increasingly a driver of inflation. But in its discussion of households, its tone sounded more concerned regarding the “squeeze” from higher rates and inflation and also added house prices to the list. It appears there remains significant uncertainty around the consumer outlook.