RBA set to hold rate at 12-year high as bank overhaul begins
AUSTRALIA’S central bank is widely expected to hold interest rates at a 12-year high at its first meeting of the year, with investors zeroing in on the future path of policy under a revamped communications regime.
Economists unanimously expect the Reserve Bank of Australia (RBA) will keep its cash rate at 4.35 per cent and probably maintain a hawkish stance given inflation, while cooling, is still elevated. As part of an overhaul, the meeting begins on Monday (Feb 5) with the decision announced at 2.30 pm on Tuesday, when updated forecasts will also be released, followed by the governor’s press conference at 3.30 pm.
The RBA “is likely to welcome faster than expected progress towards the target”, said Micaela Fuchila, an economist at BofA Securities in Sydney, referring to inflation data that came in under estimates. That should be sufficient to “confirm rates have peaked”.
Still, the RBA may join global peers such as the Federal Reserve in pushing back against any bets on a near-term easing, reflecting Australia’s cautious rate-hike campaign and inflation that is still well above the 2 to 3 per cent goal. Fuchila, who only sees the first rate cut in early 2025, expects the statement to stay hawkish “as domestic inflation remains elevated and sticky”.
The RBA’s cash rate is about 1 percentage point below the Fed’s, even as Australian inflation is higher than in the United States. Those differences help explain why governor Michele Bullock is expected to retain a hawkish position, particularly as traders responded to slower fourth-quarter CPI by bringing forward bets on rate cuts.
Data last week showed headline and core inflation came in a bit over 4 per cent, compared with the RBA’s 4.5 per cent forecasts, prompting money markets to price a 50-50 chance of easing in May and an 80 per cent chance in June.
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Economists reckon the central bank in Sydney is more likely to lower rates in the final three months of this year or even 2025.
Australia’s labour market, meanwhile, remains solid and the economy has shown resilience to higher borrowing costs, suggesting there’s no urgency to shift quickly to easing. Moreover, policymakers will not want to further fuel house prices that have been driven up by a supply shortage and high immigration.
Economists anticipate the central bank will revise its inflation and growth outlook in its quarterly Statement on Monetary Policy.
The bank’s current forecasts show price gains only hitting the top of the target in late 2025, behind economists’ estimates.
“The job of returning inflation to the 2 to 3 per cent target band is not yet done. But the RBA is now on the home stretch,” said Gareth Aird, head of Australia economics at Commonwealth Bank of Australia, the nation’s largest lender.
“The post-meeting statement accompanying the decision will be issued by the board, rather than the governor. This raises the risk that we get a fresh statement rather than the usual ‘cookie cutter’ approach.”
Aird, who predicts 75-basis-points of cuts this year, expects the RBA will retain its tightening bias though it may be “watered down”.
“Maintaining a tightening bias will also signal to the fiscal authorities that it’s too early to declare the inflation fight over,” he said.
Budget measures will be in focus in Australia as the government moves to address cost-of-living concerns among voters ahead of a state election in Victoria in March and the national budget in May. The government could extend existing rebates on electricity and rents given its focus on household costs.
“The issue we’ve got is that inflation is still a lot higher here than in most other parts of the world. So that potentially does mean that the RBA will be lagging,” said Katie Dean, head of fixed income, currency and cash at pension fund Australian Super. Also, “we probably have a slightly different fiscal dynamic, which might mean that the RBA’s on the sidelines a little bit longer”. BLOOMBERG
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