The RBA held rates steady today, as expected, but made a significant change to the policy outlook which seems to rule out another rate rise and may pave the way for a cut as soon as the next meeting in February.
At its meeting today, the Board decided to leave the cash rate target unchanged at 4.35% and the interest rate paid on Exchange Settlement balances (bank reserves) unchanged at 4.25%.
After the recent weakness in Q3 GDP, the governor's statement was significantly modified but retained the same structure and headings.
"Measures of underlying inflation are around 3½ per cent, which is still some way from the 2.5 per cent midpoint of the inflation target.
"The most recent forecasts published in the November Statement on Monetary Policy (SMP) do not see inflation returning sustainably to the midpoint of the target until 2026. The Board is gaining some confidence that inflationary pressures are declining in line with these recent forecasts, but risks remain".
"While underlying inflation is still high, other recent data on economic activity have been mixed, but on balance softer than expected in November. Growth in output has been weak. National accounts for the September quarter show that the economy grew by only 0.8 per cent over the past year. Outside of the COVID-19 pandemic, this is the slowest pace of growth since the early 1990s. Past declines in real disposable income and the ongoing effect of restrictive financial conditions continued to weigh on household consumption spending, particularly on discretionary items.
"A range of indicators suggest that labour market conditions remain tight; while those conditions have been easing gradually, some indicators have recently stabilised. The unemployment rate was 4.1 per cent in October, up from 3.5 per cent in late 2022. That said, employment grew strongly over the three months to October, the participation rate remains close to record highs, vacancies are still relatively high and average hours worked have stabilised. At the same time, some cyclical labour market indicators, including youth unemployment and underemployment rates, have recently declined.
"Wage pressures have eased more than expected in the November SMP [...] but labour productivity growth remains weak".
"Taking account of recent data, the Board’s assessment is that monetary policy remains restrictive and is working as anticipated. Some of the upside risks to inflation appear to have eased and while the level of aggregate demand still appears to be above the economy’s supply capacity, that gap continues to close." The underlined sentence is a notable new addition this month.
"The central projection is for growth in household consumption to increase as income growth rises. September quarter data suggest that both incomes and consumption had recovered a little slower than forecast, but more recent information has suggested a pick-up in consumption in October and November. There is a risk that any pick-up in consumption is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market".
"There remains a high level of uncertainty about the outlook abroad. Most central banks have eased monetary policy as they become more confident that inflation is moving sustainably back towards their respective targets. They note, however, that they are removing only some restrictiveness and remain alert to risks in both directions, namely weaker labour markets and stronger inflation. Geopolitical uncertainties remain pronounced".
There was also a significant change to the policy outlook which saw the RBA remove a critical sentence. November's paragraph read: "While headline inflation has declined substantially and will remain lower for a time, underlying inflation is more indicative of inflation momentum, and it remains too high. The November SMP forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint. This reinforces the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range."
The underlined sentence in the November statement was removed and replaced with: "Recent data on inflation and economic conditions are still consistent with these forecasts, and the Board is gaining some confidence that inflation is moving sustainably towards target".
Yesterday evening, China also announced that new stimulus measures would arrive in 2025. Reuters reported that: "China will adopt an "appropriately loose" monetary policy next year, the first easing of its stance in some 14 years, alongside a more proactive fiscal policy to spur economic growth, the Politburo was quoted as saying on Monday". Chinese shares have rallied +1.9% today after the announcement.
S&P/ASX200 8,395 -0.3%, AUDUSD 0.6395 -0.7%, Aus 2yr 3.76% -7bps, Aus 10yr 4.15% -5bps
Fin-X Wealth View
The change in the statement essentially indicates that the Reserve Bank is more confident that the next move in the cash rate will be down and not up. The market had determined this to be the case several months ago on the balance of probabilities, and it's not surprising for the governor to be a little more cautious before ruling out a rate rise, given recent experience.
However, there is no indication as to when a cut might arrive. The economy is still viewed as operating with a positive output gap and the labour market is seen as tight, both of which are usually inflationary. But the report also acknowledges some softening in the data and implies some downside risk to the forecasts. In other words, the economy may be slowing faster than the RBA anticipated.
The market has moved to price in a 65% chance of a rate cut when the next meeting is held in February. The meeting is also set to be accompanied by updated quarterly forecasts.
The 65% probability seems broadly right. Rates seem likely to be cut unless there is a sharp pick-up in consumer spending over the Christmas period. In any event, a cut is now fully priced by the end of April with 3 or 4 expected in total next year.
Regarding the Chinese stimulus announcement, investors are likely to remain sceptical until more concrete details arrive.
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