AUS: RBA on hold as expected, Governor pushes back on market pricing for cuts this year

Tapas Strickland | Markets Research 

Key points:

• RBA kept rates on hold as widely expected and kept its “vigilant to upside risks to inflation”. The Board also did give “very serious consideration” to the case for a rate rise
• Notes “policy will need to be sufficiently restrictive until the Board is confident that inflation is moving towards the target range”. Governor Bullock noted they are focussed on trimmed mean for the evolution of underlying inflation pressures
• The Governor also pushed back against market pricing in a rare bit of forward guidance, stating “a near-term reduction in the cash rate doesn’t align with the board’s current thinking” and that markets “are a bit ahead of themselves” – The suggests the Board thinking is aligned with our own that the conditions for a cut are unlikely to be in place in the near-term.
• Governor Bullock, while saying the RBA assessed policy as restrictive, acknowledged they were perhaps less restrictive than some other central banks, and as a result had less room to cut rates while maintaining restrictive settings.
• NAB retains its view that the RBA will keep rates on hold until H1 2025, having pencilled in May 2025 for the first cut.
• Offshore developments will be important to monitor, though tentative recovery in risk sentiment today may suggests we are back to looking at the data

Bottom line:

The RBA kept rates on hold as widely expected, while also maintaining its vigilance to upside risks to inflation. The most important addition to the post-Meeting Statement was the line “policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range”, suggesting the RBA’s default is to keep policy unchanged until that confidence builds. The rate assumptions which has one implied rate cut in H1 2025 (4.0% in June 2025 vs. prior SoMP of 4.2%), still has inflation returning to the mid-point by end of 2026 with trimmed mean inflation expected to be 2.7% by June 2026 (previously 2.6%) and 2.6% by December 2026.

Governor Bullock in the post-Meeting press conference noted the Board did discuss the merits of hiking rates, but the risks associated warranted holding and accepting the notion that we might have to hold for some time. Reflecting this, Ms Bullock pushed back on market pricing for cuts in 2024, noting that “what we can say is that a near-term reduction in the cash rate doesn’t align with the board’s current thinking” and that the Board is “vigilant to the upside risks. And if it does appear that inflation is not tracking the way we are forecasting, then they will, if needed, increase interest rates.”

Ms Bullock nominated the benchmark of getting inflation to the top of the 2-3% target band by end of 2025, with a mid-point by end 2026. If it looks like it is shifting out again, then the probabilities of an interest rate rise would rise again. On that observation, it was discussed that policy was not taken as high as offshore (“we didn’t go as high as the Fed…we’ve chosen that because we’ve deliberately tried to follow this narrow path of bringing inflation back down at the same time as we preserve what we can in the labour market”). Risks though were considered to be broadly balanced.

On inflation, the RBA remained concerned about the degree of excess demand in the economy. There was still assessed to be a positive output gap, with the SoMP noting “the slow progress on disinflation over the past year suggests that demand continues to exceed the capacity of the economy to supply goods and services”. Reinforcing this observation that “firms continuing to report that they operate at relatively high levels of capacity utilisation with input cost inflation remaining above longer run averages”.

In the SoMP Liaison box it was noted that while goods firms generally expect their selling price inflation to slow noticeably over the year ahead, services firm expect growth in their selling prices to be little changed over the year ahead. Against that the current level of the cash rate is still assessed to be “restrictive” and overall financial conditions were also assessed to be restrictive, but interestingly “a little less so than at the time of the May Statement”.

Activity forecasts were little changed. GDP 1.7% in December 2024 (prior 1.6%), 2.5% in December 2025 (prior 2.3%) and 2.4% in December 2026. The unemployment rate profile is slightly higher at 4.3% for December 2024 (prior 4.2%), 4.4% for December 2025 (prior 4.3%) and 4.4% for December 2026. In the SoMP it was noted that “risks to the domestic outlook are assessed to be broadly balanced”.

NAB retains its view that the RBA will keep rates on hold until H1 2025, having pencilled in May 2025 for the first cut.

Chart 1: August SoMP forecasts

Chart 2: Output gap still positive

Chart 3: Inflation only back to target in moderate fashion; Bullock notes end 2025 to upper band of 2-3% target is a key benchmark

Chart 4: Unemployment rate expected to rise

Chart 5: Labour market remains tight

Chart 6: Firms mixed on price indicators, services firms still see relatively high cost growth and final price growth

Chart 7: Neutral rate is just above 3.5%

Chart 8: RBA Statement Track Changes 

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