‘Encouraging signs of progress’: RBA

In the final monetary policy meeting of 2023, the Reserve Bank of Australia (RBA) made the decision to hold the cash rate steady at 4.35 per cent.

The minutes from the December meeting revealed that the board had noted there had been “encouraging signs of progress towards the board’s objectives and that this needed to continue”.

The decision to hold the cash rate came as the RBA believed that the recent datasets over the previous month “did not warrant a material revision to the outlook and that there is the possibility of a larger rise in the unemployment rate than anticipated”.

“Members observed that monetary policy was working to bring aggregate demand and supply into closer alignment. They noted that the risk that it takes longer than expected to return inflation to target was balanced by the risk that aggregate demand slows more quickly than anticipated,” the RBA stated.

Furthermore, it acknowledged weakening consumption growth as households continued to feel a “painful squeeze” on their finances, with real disposable incomes being hindered by inflation and higher interest rates.

Indeed, the RBA recently evaluated the state of the country’s mortgage health and unveiled that there was increasing pressure on Australian households with mortgages.

RBA head of financial stability Andrea Brischetto acknowledged during a press conference in Sydney that many households were facing significant financial pressures as a result of rising rates and inflation.

Additionally, board members acknowledged that the pace of disinflation in some other countries over recent months had accelerated.

“If emulated in Australia, this would be helpful in bringing inflation back to target,” it stated.

Ultimately, the RBA agreed that there was “sufficient value” in waiting for further data in order to assess how the balance of risks was evolving and the best way to balance these risks when setting policy.

“Members also discussed the importance of preventing inflation expectations from drifting away from the inflation target and committed to monitoring this closely. At the time of the meeting, they agreed that inflation expectations remained consistent with the inflation target,” it said.

Commonwealth Bank head of Australian economics Gareth Aird noted that recent domestic economic data has shown that the economy is “slowing more quickly than the RBA anticipated in November when it published its updated economic forecasts”.

“Our suspicion is that the RBA has wanted to subtly convey today that the economy has indeed slowed more than they expected in November,” Mr Aird said.

“As such, they included the statement that there is the possibility of a larger rise in the unemployment rate than anticipated.”

Mr Aird further stated the major bank’s base case remains unchanged and sees the RBA to hold the cash rate at the February 2024 meeting despite near-term risks.

“We continue to expect an easing cycle commencing in September 2024. We have 75 bps of rate cuts in our profile in late 2024 and a further 75 bps of easing in 1H25, which would take the cash rate to 2.85 per cent,” he said.

Similarly, Adam Boyton, ANZ head of Australian economics, said their views on the RBA also remain the same, viewing the current cash rate of 4.35 per cent as the peak.

“We expect the RBA will retain a tightening bias over the first half of 2024,” Mr Boyton said.

“Rate cuts remain some distance off (we see the first easing in November 2024), with tax cuts (from 1 July 2024) and a likely additional discretionary fiscal easing to come first.”

Westpac chief economist Luci Ellis stated that post-meeting data releases had “rendered much of the analysis in the minutes stale”.

“The board will need to incorporate a fresh assessment of the outlook for domestic demand ahead of its February meeting, as well as the November and December reads on inflation,” Ms Ellis said.

Ms Ellis added that unless inflation data is “noticeably higher than expected”, the case to raise interest rates in February has been weakened by recent data flow.

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