LUCI’S CALL: RBA keeps its options open

The Reserve Bank left the cash rate on hold at 4.35 per cent at its February Board meeting, as most people had expected.

Inflation has come down a little faster than the RBA thought three months ago and growth in the economy has been soft, but the Board is still worried that price pressures might not ease as fast as they would like.

Those concerns centre on services inflation and they haven’t ruled out the possibility that further tightening might be necessary. In fact, Governor Michele Bullock made it clear at the press conference that she wasn’t ruling anything in or out at this stage. 

The RBA still assesses that the level of demand in the economy is outstripping supply and the labour market remains tight, and that lies at the heart of concerns that services inflation could stay higher for longer.

That’s why they’re not completely ruling out another rate hike, unlike some of their peers overseas.

We don’t think it will come to that. As inflation continues to fall, the labour market eases and consumer spending remains soft, we expect the RBA will gain confidence that inflation will return to the 2-3 per cent target band on the timetable they want to see.

If that happens, they’ll be confident enough to reduce interest rates a little and start softening their contractionary stance. 

In our view, that level of comfort for the RBA will be reached around September giving them scope to cut rates a couple of times before the end of this year. 

The future is uncertain, and the RBA is keeping all options open for now, but most likely the cash rate will be on hold for some months to come yet.