RBA Review: Bringing rates higher and remain data dependence
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RBA hike the cash rate to 4.35% as most market participants anticipated
RBA hike the cash rate to 4.35% as most market participants anticipated. The key statement of "Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks." has changed to "Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks." This weak language seems to suggest the RBA is tilting towards not hiking anymore but will let data guide their action as they are not sure where inflation may go in a short run. The rhetoric is similar to what the RBA has been stating for the past month and they have acted accordingly with a hike in the November meeting in sight of higher Q3 CPI.
The decision remains in line with RBA's rhetoric in2023 so far after they switch be data dependent and stays patient in assessing the effect of cumulative hikes while keeping a close eye on inflation dynamics. We have revised our forecast of terminal rate to be 4.35% by year end 2023 with no more hikes in sight. RBA is still viewing inflation is too high, citing "Inflation in Australia has passed its peak but is still too high and will remain so for some time yet.", especially highlighting the persistent strength in service CPI gloablly. However, the room for RBA to further tighten without significantly hindering economic growth is minimal and we do not see the RBA to tighten anymore unless inflation climbs again. The household balance sheet are restricted by mortgage cost and inflationary living pressure, while business are facing the tightest financial conditions in months, alongside peaking labor market even as the Australian economic growth being stronger than market consensus. The RBA did not change their inflation forecast and seems to be content with the trajectory of inflation by seeing 2-3 percent in 2025.
Apart from inflation dynamics, RBA is aware of uncertainty around global outlook and how the Australian economy reacts to high rate, given the complexity of inflation dynamics towards different household and business. This warrant caution to market participants that rate decision in the future meetings will remain data sensitive.