Cash rate on hold at 4.1% as new Board waits for more information to be ‘100% confident’.
As expected, the RBA held the cash rate steady at 4.1% following the first meeting of the newly formed Monetary Policy Board.
Since the last meeting of the old RBA Board in February, the tone in global markets and confidence in the US economy have both deteriorated noticeably. However, the new Board assessed that policy is well placed to respond to developments “if they were to have material implications for Australian activity and inflation.” The Board will no doubt be mindful of the Treasury modelling revealed in last week’s Budget papers, suggesting that even a significant tariff war involving other countries imposing retaliatory tariffs on the US would not affect growth and inflation in Australia much.
The Board therefore remains focused on the domestic data flow. This has not shifted enough for the RBA to change its mind about the outlook for inflation just yet. Back-to-back cuts were therefore never on the cards. Indeed, in the media conference the Governor confirmed that a rate cut was not explicitly considered at the meeting and that holding the cash rate steady was the consensus view on the Board.
The post-meeting statement did acknowledge the reality that inflation is now back in the target range, with the final sentence being tweaked to add the word “sustainably” before “return to target”. However, it also suggested a relatively high bar for further rate cuts. At the February meeting, the previous downside surprises on inflation relative to forecast gave the previous Board “more confidence that inflation is moving sustainably towards the midpoint” of the 2–3% target. This meeting, though, the language highlighted that since then, inflation had moved in line with the February forecast. It stated that the “Board needs to be confident that this progress will continue so that inflation returns to the midpoint of the target band on a sustainable basis”. At the post-meeting media conference, Governor Bullock noted that each quarter disinflation remains on track, the Board gains confidence, but it is not 100% confident.
The post-meeting statement and media conference also acknowledged the considerable risks around both the outlook for consumption growth and the current tightness of the labour market. This, plus other recent communications and internal work released under Freedom of Information, does suggest that the RBA is grappling with the range of views in the market about the outlook. So far, though, this has not shifted its own view much.
One might reasonably ask how confident the Board needs to be when underlying inflation is already in the band, and how much variation from the 2.5% midpoint will be deemed to be consistent with sustainability. One might also reasonably ask whether the appropriate stance of monetary policy in this situation is as restrictive as it is currently, with only the November 2023 ‘insurance’ hike having been reversed.
At the February meeting, the RBA assessed that the market path for rates prevailing at the time would not deliver inflation sustainably at the target midpoint. (Indeed, in the post-meeting media conference, the Governor described it as “unrealistic”.) This time around, the Governor’s language was more conciliatory. She stated that the RBA did not “endorse or dispute” the market path and was more open to the idea that it would deliver on the RBA’s inflation objective after all. The RBA, she said, was simply ”more circumspect” than market participants. She also indicated that the Board would reconsider whether it was still the case that the market path delivered a too-high path for inflation when it updates the forecasts ahead of the May meeting.
We continue to think that further rate cuts are coming, with the next most likely in May when the RBA should be able to point to yet another pleasant surprise on inflation, just as it noted this meeting that wages growth had eased more than expected. Recall that the RBA’s February hawkishness stemmed from its view that trimmed mean inflation would get stuck at 2.7% if the Board followed the then market path and cut 3–4 times this year. If inflation instead looks like settling closer to (or even below) the 2.5% midpoint of the RBA’s target range, this will give the RBA more room to reduce the restrictiveness of policy and even approach something like ‘neutral’.
One reason not to move this meeting is that a key source of uncertainty will be resolved very soon. As noted above, the RBA is agnostic about whether the current trade and geopolitical uncertainties will affect Australian growth and inflation materially. With the US administration’s ‘Liberation Day’ announcement just a day away, there was therefore no appetite to pre-empt something that might not be a big deal for Australia over the horizon that monetary policy can affect.
All in all, this meeting read as something of a holding pattern. The Governor acknowledged in the media conference that the longer inflation continues to turn out in line with the February forecasts, the more confident the Board will become that inflation will return sustainably to the target midpoint. But the Board isn’t “100% confident” and therefore assesses that the prudent approach is to wait for more information. One might reasonably ask whether 100% confidence is the appropriate bar to act when policy is currently restrictive and global uncertainties are likely to stay high. We suspect the 100% figure was not meant to be taken literally. In any case, the tone of this statement is broadly consistent with other recent RBA communication.
