As was widely expected, the RBA Board left the cash rate on hold at its late-March meeting, at 4.35%. The language of the media release and press conference confirms that the Board is most likely on hold for a while yet.
As was widely expected, the RBA Board left the cash rate on hold at its late-March meeting, at 4.35%.
There were two key changes in the language in the final paragraph. The first was the switch from ‘a further increase in interest rates cannot be ruled out’, to ‘the Board is not ruling anything in or out’ – language taken from the media conference last month. The second was the elimination of the language ‘and will do what is necessary to achieve that outcome’.
This second deletion is particularly significant: versions of this language have been in the media release ever since the first increase in the cash rate this cycle, back in May 2022. The media release after that meeting read, ‘The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.’
The implication here is that the Board no longer needs to commit to doing what is needed, because no additional action is needed to achieve the desired outcome. With these deletions, what remains in the media release are the words of a central bank that is on hold, but not quite willing to say so outright. In the press conference, the Governor did not explicitly indicate whether a rate increase was considered in this week’s meeting, but rather highlighted that the Board always considers a range of possibilities.
By saying it is not ruling anything in or out, the Board is flagging the possibility that some shock could still derail the current trajectory of declining inflation and require a rate hike. But there is no sign of this occurring. The media release highlighted the ‘encouraging signs that inflation is moderating’ and the slow growth confirmed by the national accounts. The paragraphs on the outlook and the text on inflation expectations were unchanged from the February meeting. The overall message was of a disinflation that is on track.
There were no changes in the text in response to the recent upside surprises in inflation in the United States. The Board had already been highlighting the persistent services inflation overseas, and presumably concluded that it was already exercising the required amount of caution in this area.
The Board also remains cautious on the issue of labour costs. Although it acknowledges that wages growth appears to have peaked and productivity growth has picked up, the media release highlighted that at current rates, wages growth remains consistent with the inflation target, ‘only on the assumption that productivity growth increases to around its long-run average’. The word ‘only’ was inserted into the statement this month. As we at Westpac Economics have been highlighting for some months, most recently in Senior Economist Pat Bustamante’s note last week and accompanying video, there are good reasons to expect that productivity growth will recover. But the RBA Board is not yet ready to assume that this recovery will occur.
In the press conference, the Governor reiterated the importance of holding on to the gains in the labour market. The RBA continues to expect employment to increase, but more slowly than the labour force will. The unemployment rate is therefore forecast to rise.
The Board’s priority is still to ensure that inflation returns to the 2–3% target range. But the flow of recent data suggests that (absent some shock) no further rate hikes are needed to achieve this. The text of the media release suggests that the Board recognises that.
Given that recent data flow and the shift in the RBA’s language, we continue to expect that the RBA is on hold until its late-September meeting. At that point, it will have the full suite of data for the first half of 2024, including productivity and labour cost growth. Assuming things continue to pan out as expected, it will then have enough assurance that inflation will continue to decline on the desired trajectory. That will allow the Board to reduce some of the tightness in the stance of monetary policy and preserve more of the gains on employment.
