RBA flags 'significant uncertainties' in economic outlook

The Reserve Bank of Australia (RBA) has decided to hold the official cash rate at 4.1 per cent for the fourth consecutive month following its October monetary policy meeting.

Notably, the October board meeting has marked the initial meeting with Ms Bullock presiding as the central bank’s governor.

Ms Bullock assumed the role of governor on 18 September following the retirement of former governor Philip Lowe after his seven-year tenure in the position.

On the decision, Ms Bullock said: “The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast period and with output and employment continuing to grow. Inflation is coming down, the labour market remains strong and the economy is operating at a high level of capacity utilisation, although growth has slowed.

“There are significant uncertainties around the outlook. Services price inflation has been surprisingly persistent overseas and the same could occur in Australia.

“There are also uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages respond to the slower growth in the economy at a time when the labour market remains tight.

“The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will continue to depend upon the data and the evolving assessment of risks.”

Reacting to the decision, CreditorWatch chief economist Anneke Thompson said the decision to hold the cash rate steady comes as ongoing weak retail trade and consumer confidence gave the RBA “the clear signal that their efforts to reduce demand in the economy have worked very well”.

“While some items in the Consumer Price Index (CPI) ‘basket’ continue to record price rises, these rises are by and large not related to high consumer demand, and therefore not enough to convince the RBA to move again to cool demand further,” Ms Thompson said.

“All [groups’] monthly CPI rose 5.2 per cent over the year to August, up from 4.9 per cent the month prior. Whilst a higher figure is not welcome news for the RBA, the figure is heavily impacted by the higher cost of fuel this month.”

PropTrack senior economist Eleanor Creagh stated that economic conditions are expected to further soften in the coming months as the “significant increase in mortgage servicing costs, together with cost-of-living pressures, has seen consumer spending slow and weigh on economic activity”.

“Unless there is a shift in the disinflationary outlook, it’s likely the peak in the cash rate is already in for this monetary policy tightening cycle.”

Ms Creagh added that the decision to hold the cash rate will “underpin buyer and seller confidence for the spring selling season”.

“Looking ahead, interest rates have very likely peaked and population growth is rebounding strongly,” Ms Creagh said.

“Together with a shortage of new home builds, prices are expected to rise and more markets will likely reach new record levels after recouping last year’s fast falls.”

CoreLogic research director Tim Lawless said that the RBA will likely be “keeping a close eye on the housing sector”.

“Rental pressures are front and centre in the inflation numbers, however the annual change in CoreLogic’s measure of market rents has been slowing since October last year,” Mr Lawless said.

“CPI rents tend to lag market rents, implying CPI rental growth could be close to peaking.”

AMP Bank chief economist Shane Oliver said there are still concerns that the RBA may have "tightened more than necessary" and maintains a high risk of recession at 50 per cent.

"As a result, while the risk is still on the upside for the cash rate in the short term with 40 per cent chance of another hike by Christmas, the RBA probably won’t have to act on its tightening bias, and we continue to see it cutting rates through next year starting around June," Mr Oliver said.

ANZ head of Australian economics Adam Boyton said the central bank "appears reasonably comfortable" for now.

"While the risks of additional RBA action might be rising we see nothing in today’s decision or statement to push us off our view that the RBA is on an extended pause as it examines how the monetary tightening to date washes through the economy," Mr Boyton said.

Commonwealth Bank of Australia (CBA) chief economist Stephen Halmarick said the major bank still views that the hurdle for another cash rate hike is high, and that the "likely scenario is an unchanged cash rate well into 2024".

"We expect a gradual monetary policy easing cycle to get underway in May next year, progressively taking the cash rate down to a more neutral level," Mr Halmarick said.

Westpac chief economist Bill Evans said: "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," Mr Evans added.

A hold was widely expected

Prior to the decision, the consensus among the market and economists alike was that the cash rate hit its peak in June 2023 and will continue to remain that way.

Major banks Westpac, ANZ, and the Commonwealth Bank of Australia (CBA) once again predicted another hold in the cash rate following the October board meeting.

Economists from these major banks previously confirmed that the next movement in the cash rate will likely be rate cuts over 2024.

Westpac chief economist Bill Evans added that the monthly CPI data for August was “unlikely to be a game changer” despite annual inflation rising in the 12 months to August, which primarily reflected “a 9 per cent lift in petrol prices”.

An outlier in the conversation of the cash rate peak, NAB also predicted a hold in October, however, still forecast one final cash rate hike to a peak of 4.35 per cent next month (November 2023).

[RELATED: Economists forecast a cash rate hold in October]