As expected, RBA cuts cash rate 25bp to 4.1%. But a hawkish tone in the forecasts and rhetoric cements our view that RBA will move slowly from here.
As was widely expected, the RBA cut the cash rate today, by 25bp, to 4.1%. Inflation has declined faster than the RBA’s previous forecasts implied, with underlying inflation running at an annual rate consistent with the 2–3% target over the second half of 2024. Getting inflation sustainably back down to target was the Board’s highest priority. Given these data and the likely near-term outcomes they imply, it would be difficult to say that the goal is off-track. In fact, the RBA’s revised forecasts now have trimmed mean inflation constant (dare we say ‘sustained’) at 2.7% out to mid 2027. The post-meeting statement also acknowledges that inflation could be declining a bit faster than earlier expected.
Following today’s cut, the RBA assesses policy to still be restrictive. It recognised the progress made on getting inflation to target. It also acknowledged that upside risks to inflation had eased and that ‘there are signs that disinflation might be occurring a little more quickly than earlier expected.’
In a hawkish move, though, the press statement highlighted that there was a risk of easing ‘too much too soon’, in which case disinflation would ‘stall’ and inflation would ‘settle above the midpoint of the target range’ – exactly what their forecasts show trimmed mean inflation doing. The Board attributed this to ‘lingering tightness’ in the labour market. The prior easing in the labour market had ‘stalled’ over the second half of last year.
The hawkish tone is also an outworking of the 2023 RBA Review. Recall that the RBA Review recommended, and the latest Statement on the Conduct of Monetary Policy adopted – a framing of the inflation target that requires the RBA to set policy ‘such that inflation is expected to return to the midpoint of the target’, even though ‘all outcomes within the target range are consistent with the Reserve Bank Board’s price stability target’. The Board will therefore be more discomfited by the revised forecasts for trimmed mean inflation than they would have been prior to the Review. It also explains why in the post-meeting press conference, the Governor emphasised that people still needed to be patient to get inflation down – down by a whole 0.2ppts.
These forecasts are predicated on the cash rate following a path traced out by market expectations at the time of the forecast review for three rate cuts by year-end. In the post-meeting press conference, the Governor made it quite clear that the Board thinks that this is ‘far too confident’. We can therefore rule out back-to-back cuts and continue with our existing view that they will hold rates steady at the next meeting in April. But, just as inflation surprised the RBA on the downside recently, it could do so again.
A key driver of the hawkish tone is the RBA’s view of the labour market. The unemployment forecasts were revised down to level out at 4.2%. While the Governor declined to provide an estimate of the unemployment rate that is consistent with full employment, the structure in the forecasts suggests that the staff are still working on the assumption of a NAIRU around 4½%. The RBA’s framework (appropriately) goes beyond this single number and considers other variables such as underemployment and vacancies. The labour market has been tighter than expected, and yet inflation has fallen faster than the RBA expected. In the media conference, the Governor expressed hope that maybe Australia could sustain a lower unemployment rate with inflation at target. But the RBA is not willing to bet on such an outcome, even though a number of peer economies had a similar experience in the years leading up to the pandemic, with NAIRU estimates being revised down repeatedly.
Some other elements of the forecasts also appear quite hawkish. Forecasts for public demand growth were revised up, driven by recent state and federal budget updates. Consumption growth was revised down, but only a little and to a profile that looks to be still well above consensus. Overall growth was characterised as ‘returning to its trend rate’. But even allowing for the slower expected population growth, actual GDP forecasts look a little softer than past assumptions of potential output. The fragility of the labour market outlook to an early turn down in the current strong growth in employment in the healthcare and social assistance industry – the subject of an SMP Box – was barely acknowledged.
By explicitly characterising the stance of policy following the cut as restrictive, the Board is implicitly suggesting that, as long as inflation keeps declining, further rate cuts are on the cards. But they are not promising anything and expect it will be a long road still before they can declare victory on that last few tenths of a percentage point of inflation. The final paragraph of the post-meeting statement was unchanged.
Overall, this was a hawkish set of communications. While the inflation and labour cost data have turned out a bit better lately (and we will know more about the latter tomorrow), there was not a further evolution in the RBA’s thinking around the supply side. A moderate, almost grudging, path of easing is likely from here.
