Tightening Bias Retained, Cuts Not Expected Until H2 2024

The RBA kept rates at 4.35% at its February meeting as expected. It also maintained its tightening bias and caution regarding services inflation and the labour market. Updated forecasts show that inflation is expected to return to close to the top of the target band in Q2 2025, as was the case with the August forecasts, and the mid-point in Q2 2026. Governor Bullock will give a press conference at 1530 AEDT.

• A shift to an easing bias is going to need not only further inflation moderation to give the Board confidence it is returning to target, especially in the services component, but also a significant easing in labour market pressures. It revised up its unemployment rate forecast to 0.2pp to 4.2% in Q2 2024.
• Even though inflation is now forecast to return to around 3% 6 months earlier, the tone of the meeting statement remained cautious given that it is still around 18 months away and close to the edge of the RBA’s “reasonable timeframe”.
• The Board kept its options open by stating that “a further increase in interest rates cannot be ruled out”. In contrast, there was no suggestion that easing was considered and we will need to wait for the minutes to find out what was discussed. But the OCR was included in the new forecasts, which given the difficulties this has caused in the past was interesting, and there is around 50bp of cuts projected for H2 2024 but nothing before then.
• Also on a more hawkish note, the RBA noted that the more gradual decline in services inflation was “consistent with continuing excess demand … and strong domestic cost pressures, both for labour and non-labour inputs”. They will continue to monitor services trends overseas.
• It was also observed that the labour market is “tighter than is consistent with sustained full employment and inflation at target”.
• The same uncertainties clouding the outlook were catalogued in February as in December.