Tests lie ahead for new RBA governor after steady start

The Reserve Bank Board left the cash rate unchanged at 4.10 per cent at its October meeting, as expected, in Michele Bullock’s first meeting as governor. 

The decision statement was largely unchanged from September and it’s perhaps more instructive to consider what was not included. 

There was no sound of alarm around inflation data for August, which came in on the high side. The RBA has a tough task ahead to return inflation to the target band, and with annual CPI still running above 5 per cent they may have voiced concern, but that was absent. 

Clearly the Board is taking time to assess the impact of the tightening to date and will be closely watching the upcoming quarterly inflation update for guidance ahead of its November decision.

The September quarter CPI result will also have an influence on the RBA when it updates its wider economic forecasts in November. 

Westpac economists see August’s strong inflation number as pointing to some upside risk, particularly given the sustained lift in fuel prices over the last couple of months and slightly higher than expected services inflation.

We think inflation will finish the year slightly above 4 per cent – still two percentage points away from the lower end of the 2-3 per cent target range, underlining the RBA’s challenge. 

In terms of the new governor, there was very little change in communication this time, but she may look to stamp her mark more clearly at the November meeting as fresh economic data and revisions to staff forecasts come through. 

It will be an interesting couple of Board meetings ahead with the policy decision finely balanced. Even so, we maintain our view that the tightening cycle has reached its peak and the next move is likely to be down rather than up, probably in the second half of next year.