Rates On Hold, Upside Risks To Inflation Forecast Likely Needed For A Hike

The RBA left rates at 4.1% at its August meeting but retained its tightening bias, in line with our expectations. Its reasons for pausing for a second consecutive month were unchanged from July –significant uncertainty, already material tightening which is working and it will “provide further time to assess the impact” of hikes to date. Importantly it appears that its forecasts are broadly unchanged from May, suggesting that there will need to be an increase in upside inflation risks from here for rates to rise further. The details will be published on Friday including Q4 2025.

• While “some further tightening of monetary policy may be required” it will now depend upon the “data and the evolving assessment of risks”, thus RBA decisions have become even more data dependent (with key areas unchanged) and contingent on risks to its forecasts.
• Inflation is projected to continue moderating reaching around 3.75% by end 2024 and the 2-3% target by late 2025. The phrase that inflation would remain high for “some time yet” was removed from the meeting statement and the warnings regarding the damage it can do was moved down.
• Below-trend growth is “expected to continue for a while”. The Board was more definite on the weakness in consumption and added dwelling investment. It expects GDP growth to be around 1.75% “over 2024” and “a little above” 2% over 2025.
• The assessment of the labour market was marginally stronger with it remaining “very tight” and the easing now only being “a little”. The end 2024 4.5% unemployment rate forecast is unchanged but end-2023 may still be revised down given recent data.
• Inflation remains “too high”, services prices a risk, productivity needs to improve for wages to stay consistent with target, returning inflation to target remains a “priority”, house prices are rising and there are still significant uncertainties.
• See statement here.