The Governor’s decision statement was widely anticipated including maintaining the soft tightening bias.
The decision by the Reserve Bank Board to hold the cash rate at 4.1% was seen as a near certainty by most market commentators.
While the Board considered two options in August – ‘on hold’ or a 0.25% rate increase –the Minutes from that meeting showed a clear preference for the ‘on hold’ option without the qualifications seen in July which the Minutes to that meeting described as a ‘finely balanced’ decision.
Since the August Board meeting there has been: further evidence of an easing in wage pressures; some softening in the labour market; a further fall in inflation as measured by the monthly inflation indicator; and more timely indicators pointing to weak consumer spending. There has also been extensive coverage of the problems now being faced by the Chinese property sector.
There were few significant changes in the Governor decision statement relative to the August meeting. Where there were shifts, these were broadly consistent with the encouraging data developments listed above.
The Governor is even more confident about the inflation trajectory, noting: “Inflation in Australia has passed its peak and the monthly indicator in July showed a further decline.”
Commentary on the labour market was a little more relaxed: “… conditions in the labour market remain tight” – softened a touch from last month’s “very tight”.
He also made note of risks around the China story: “… there is increased uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market.”
As we predicted in our pre-meeting note, despite rising confidence that the inflation target will be achieved, the statement retained the warning that “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe.”
The Board will be aware of the volatile Australian dollar and any indication that it was dropping its tightening bias would only add further downward pressure to the currency. It is already dealing with the uncertainties in China and the market’s discomfort with the official forecast for inflation to only reach 2.8% by end 2025 – only just within the band nearly three and a half years after the tightening cycle began.
Following the decision to keep rates on hold in August, Westpac called the end of the tightening cycle with the next move likely to be a rate cut cycle from August next year.
We believe that the likely ongoing weakness in spending and the continuing reduction in inflation is likely to close any window for further ‘insurance’ to assist with the return to target.
The Governor’s statement today certainly supports that view.
