Governor Bullock has made absolutely minimal changes in her first Statement despite evidence of higher inflation in the September quarter. She is likely to make her mark in November when the staff refreshes their forecasts for growth and inflation.
As expected, the Reserve Bank Board decided to leave the cash rate target unchanged at 4.1% at its October meeting.
While the decision was widely anticipated the issue for markets was whether new Governor Bullock would decide to send some different messages than had been signalled in previous Statements under Governor Lowe.
For instance, these messages may have indicated a greater concern around achieving the inflation target in the appropriate time frame; more concern about the underperforming Australia economy; the resilience of the labour market; or, the surprise recovery in house prices.
There were no such changes in the Statement.
The inflation issue was the most likely “candidate” for a revised approach.
However, as with the other key topics the Governor chose to almost exactly stick to the script that had been established by Governor Lowe.
The most contentious issue is around the implications of the August Inflation Indicator for the September quarter Consumer Price Index.
Westpac has lifted its forecast for Trimmed Mean Inflation from 0.8% to 1.1%, mainly due to higher inflation in the services sector for which the August report provides valuable information for the whole quarter.
The Governor’s Statement refers to “the prices of many services are continuing to rise briskly” although this is little changed from the September Statement “the prices of many services are rising briskly.”
As a result of our increase in our forecast for the Trimmed Mean in September we have lifted our forecast for annual Trimmed Mean inflation in 2023 from 3.8% to 4.1%.
Services plus higher fuel prices have lifted our September quarter forecast for headline inflation from 0.9% to 1.1% and annual inflation in 2023 from 3.9% to 4.3%.
The RBA is currently forecasting inflation by end 2023 at 3.9% (Trimmed Mean) and 4.1% (Headline).
Presumably the RBA forecasters would also be revising their own forecasts on the basis of the August Inflation Indicator but there is no such indication in the Statement.
In the Governor’s Statement the sentence “The central forecast is for CPI inflation to continue to decline and to be back within the 2–3% range in late 2025.
Despite our slightly higher profile for inflation in 2023 our forecasts are still in line with the RBA achieving their 2025 target.
The Governor chose not to react to those possible upgrades to the inflation forecasts – better to await the official September quarter CPI report which will be a key input into any forecast revisions.
Governor Bullock has opted to maintain the status quo prior to reviewing her position once the staff’s revised forecasts are available for the November meeting.
On the basis of our revised inflation forecast we expect the September Inflation Report will provide grounds for the staff inflation forecasts for the end of 2023 to be revised a little higher but not threaten the key goal of reaching the inflation target by 2025.
We do not see such revisions as providing sufficient evidence for a rate hike at the November meeting.
