RBA Review: Waiting Q3 CPI to Bring Rates Higher
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RBA held the cash rate at 4.1% as we have forecasted. The key statement stays and suggest RBA is leaving the doors open for more tightening to come before the end of year after Q3 CPI data is released.
RBA held the cash rate at 4.1% as we have forecasted. 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." stays and suggest RBA is leaving the doors open for more tightening to come before the end of year after Q3 CPI data is released. While some market participants may have shifted their view that RBA has done tightening, we believe the RBA will remain CPI sensitive and will hike the last 15bps after Q3 CPI showing a spike in inflation on higher energy prices.
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 are keeping our forecast of terminal rate at 4.25% by year end 2023 with one more 15bps hike from RBA after the release of Q3 CPI confirming inflation has flared up on higher energy prices in Q3. RBA's commitment towards battling inflation has not faded with their wordings on "Inflation in Australia has passed its peak but is still too high and will remain so for some time yet.", especially highlighting the strength in service and energy CPI. However, the room for RBA to further tighten without significantly hindering economic growth is minimal and we only see the RBA to tighten one last time in the coming month. 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 believes their inflation forecast is intact and seems to be content with the trajectory of inflation, thus 4.25% should be the terminal rate.
Elsewhere, RBA is acknowledging uncertainty around global outlook given the complexity of inflation dynamics and the Chinese economy. This warrant caution to market pariticpants that rate decision in the future meetings will remain data sensitive.
I,Cephas Kin Long Yung, the FX Analyst declare that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further declare that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.