RBA holds, further increases 'not ruled out': Bullock

The Reserve Bank of Australia (RBA) has decided to hold the official cash rate at 4.35 per cent during its inaugural cash rate decision for 2024.

The decision to hold was almost unanimously expected by bank economists and the market at large following the lower-than-expected December quarter Consumer Price Index (CPI) print released last week (31 January), which revealed the smallest quarterly increase since March 2021 of 0.6 per cent.

The ASX rate tracker as of 5 February had predicted 95 per cent “no change” and a 5 per cent chance of a decrease to 4.1 per cent.

Today’s (6 February) meeting marked the beginning of the central bank’s new process regime following the recommendations made in the RBA review.

Going forward, the RBA will now meet eight times a year (every six weeks) instead of 11, with cash rate meetings being spread over two days. The board met yesterday afternoon (5 February), the first time a monetary policy meeting has occurred on a Monday in the RBA’s history.

In its post-meeting statement, the RBA revealed: “While there are encouraging signs, the economic outlook is uncertain and the board remains highly attentive to inflation risks.

“Returning inflation to target within a reasonable time frame remains the board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment.

“The board needs to be confident that inflation is moving sustainably towards the target range. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable time frame will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out.”

During the post-decision media conference, RBA governor Michele Bullock reiterated that high inflation "hurts everyone" and that the board remains steadfast in its goal to return it to the target band and that the board has not "ruled in or ruled out" any possible rate hikes.

When asked on what the biggest risks to the Australian economy are, Ms Bullock stated: "What worries me most is that we don't manage to bring inflation back down to target without collateral damage in the labour market."

The governor mentioned renewed supply shocks, particularly the conflicts in Ukraine and the Middle East, are among those concerns.

"What's going to come from left field, that's what worries me," Ms Bullock said.

Reacting to the decision, PropTrack economist Anne Flaherty said last week’s inflation figures continued the trend of declining annual growth in consumer prices and increased the probability that interest rates have hit their peak in this current cycle.

“Today’s decision is good news for the housing market which looks set to benefit from a more stable interest rate environment in 2024. Greater confidence around where interest rates are sitting should support further recovery in buyer and seller confidence,” Ms Flaherty said.

“While interest rates appear to have peaked, two years of high inflation have eroded real wages and, as of September, the household saving to income ratio was sitting at just 1.1 per cent. This is the lowest level seen since December 2007 at the onset of the Global Financial Crisis.

“Despite this, house prices have displayed remarkable resilience, with buyer demand remaining strong relative to the supply of homes coming to market.”

Anneke Thompson, chief economist at CreditorWatch, said with annual inflation still at 4.1 per cent, the figure is still too high for the RBA to consider a rate cut, however, indicators point to inflation falling faster that may result in a rate cut towards mid-2024, instead of late 2024.

“Inflation is also falling rapidly in major overseas economies, and central banks in the USA, UK and Europe are likely to consider cuts to their interest rates over the next few months,” Ms Thompson said.

Ms Thompson added that the unemployment rate will continue to play a crucial role in the RBA’s decision-making process.

“Thus far, strong employment and a low unemployment rate have given the board confidence that their monetary policy settings are not adversely impacting the jobs market,” she said.

“However, monthly hours worked by Australians peaked in June 2023, and has been on a downward trend since.

“Should the unemployment rate start increasing at a more rapid pace, the RBA board may choose to cut the cash rate sooner rather than later, as preserving the employment gains achieved since the pandemic is one of their key goals.”

Commonwealth Bank of Australia (CBA) head of Australian economics, Gareth Aird, stated the major bank does not expect the RBA "to act on its hiking bias" despite the hawkish tilt in its post-meeting statement.

"Maintaining a tightening bias signals to the fiscal authorities that it’s too early to declare the inflation fight over. The RBA would not wish to see fiscal settings loosened until further progress on inflation has been made towards the target band," Mr Aird said.

ANZ's economics team continues to favour November for the beginning of the rate easing cycle, despite the statements made by the RBA.

Westpac chief economist Luci Ellis said they doubt the RBA are "even thinking of rate cutes yet".

"Both a hike and a cut could be contemplated if the data pointed to it being necessary.

"She [governor Bullock] also emphasised that they do not need to see inflation actually inside the band, let alone at the midpoint of 2½ per cent, to cut rates. But they do need to be confident that once it gets there, it will stay there," Ms Ellis said.

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