LUCI’S CALL: RBA likely on hold, Feb meeting still ‘live’

The RBA Board kept the cash rate on hold following its December meeting, as we expected, and more likely than not we have reached the peak in the hiking cycle.

Even so, the next meeting in February should still be considered as ‘live”. 

Ahead of that, the Board will be focused on the December quarter CPI result. If inflation does not decline as the RBA intends, the Board will respond with increased rates, although this is not the most likely outcome.

Governor Michele Bullock’s statement emphasised that inflation continues to moderate, driven by the goods sector. Information received since the previous meeting in early November was described as ‘limited’ and considered ‘broadly in line’ with expectations. 

Given that backdrop, the Board did not see a need to follow up last month’s increase with another this month. Recall that the RBA’s November forecasts were predicated on ‘one to two’ increases in the cash rate, with one having already been delivered. By pausing this month, the RBA Board is giving itself ‘time to assess’ the impact of recent rate increases. 

The statement noted that both household consumption and dwelling investment are weak, and that conditions in the labour market are continuing to ease gradually.

The Board will also be aware that further rate increases from here will have much of their impact at least a year from now – by which time inflation should already be at or close to target.

Given the Board’s determination to return inflation to target in a reasonable timeframe, it is understandable that the Governor’s statement does not highlight downside risks to inflation. Even so, the October outcome does point to downside risks tempering the upside risks to inflation. 

One of these potential downsides is that government rent assistance weighed on rent inflation by more than expected. Unlike electricity rebates, this is a lasting reduction in rent levels and does not involve the ‘payback’ seen when temporary measures expire. 

In addition, headline inflation is what people experience, so the downside surprise in the October indicator lowers the risk of inflation expectations rising. 

Among the changes to the statement from last month was an acknowledgement that there are ‘encouraging signs on goods inflation abroad’. Recent downside surprises for inflation in some major advanced economies would surely also have been some comfort to the Board, given the global nature of the inflation pressures coming from goods and energy prices. 

While the Governor’s statement does not mention it, the strengthening of the Aussie dollar over recent weeks is also helpful for dampening inflation pressures, at least at the margin.

To read Luci’s full note on the RBA decision, visit WestpacIQ.