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RBA on Hold

AUS: RBA “believe[s] we have rates at the right level”; higher for longer rate assumption keeps their inflation forecasts on track.

Tapas Strickland | Head of Economcis, Markets

Key points:

  • The RBA kept rates on hold as universally expected
  • Governor Bullock “believes we have rates at the right level
  • RBA Board did discuss the option to hike; but stayed on hold
  • No explicit bias given, keeps the “not ruling anything in or out” mantra from March
  • Assesses risks as “reasonably balanced” … but also watchful on inflation upside
  • NAB continues to see the RBA on hold until November 2024, where we pencil in the first cut

Details:

The RBA held rates on hold as universally expected. What surprised though was the absence of a hawkish bias with the RBA keeping the mantra of “not ruling anything in or out”, phrasing which was adopted in March. Governor Bullock in the post-Meeting press conference noted that the Board “believe we have rates at the right level” and that the Board did discuss the option of raising rates. On balance the Board decided to stay where they were, and policy was assessed to be restrictive. While there is no explicit hiking bias, Governor Bullock said that the RBA needed to be “alert and vigilant” on inflation. That of course keeps focus on Q2 CPI (31 July).

One reason for why the RBA needs to be vigilant is that the RBA did not take much signal from the upward surprise from the recent Q1 CPI for future inflation outcomes. The May SoMP noted that “forecast disinflation is guided by a suite of models that take some signal from the stronger-than-expected March quarter CPI outcome. However, it is possible that more signal should be taken from the upside data surprise as it may suggest that there is more persistence or ‘stickiness’ in domestically determined components of the basket than currently assumed (which is not offset by the higher cash rate path assumption underpinning these forecasts)”.

The reason why trimmed mean inflation is still forecast to return to the mid-point of the 2‑3% inflation target by mid-2026 is because “the higher cash rate path in the forecasts supports the return of inflation to target”. Here the RBA has adopted the market path with the cash rate broadly steady at 4.2% until mid-2025, whereas the prior February SoMP had a cash rate assumption of 3.6% by mid-2025. The output gap was assessed to be positive but subdued aggregate demand was expected to return demand and supply into balance in the next couple of years.

The forecasts overall mean little ability to absorb additional upward inflation surprises if the economy remains resilient. In the discussion of risks, productivity growth was again raised with the RBA noting “baseline forecasts include an assumption that labour productivity growth increases to the rate recorded in the decades preceding the pandemic…if productivity is weaker than assumed, businesses would face higher costs of producing a given amount of output, putting upward pressure on prices paid by consumer”.

Other forecasts for the economy were broadly similar. The unemployment rate by end 2024 is expected to be 4.2% (4.3% in prior February SoMP) and to stabilise at 4.3% beyond mid-2025. The RBA notes the adjustment in the labour market is occurring via declining average hours and fewer job vacancies. Wages growth was again assessed to be around its peak. GDP growth was revised down a little in 2024 at 1.6% y/y (1.8% in prior February SoMP), before picking up to 2.3% y/y in 2025 (2.3% in prior February SoMP). It was noted consumption growth was very weak even though population growth is very strong.

Chart 1: RBA still forecasts trimmed mean back to target by mid-2026

Chart 2: RBA detailed SoMP forecasts reveal the cash rate assumption drives - with rates on hold until mid-2025

Chart 3: Consumption growth is weak suggesting rates are restrictive

Chart 4: Labour market still tight, but easing on some metrics such as hours and vacancies

Chart 5: RBA post-Meeting Statement track changes

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All prices and analysis at 7 May 2024.  This information has been prepared by National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 ("NAB").

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NAB Markets Research

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