RBA Review: In Line with Forecast
Bottom Line: No change in monetary policy as forecast with minor wordings change in forward guidance which does not provide any material shift in RBA's stance to be CPI sensitive in future tightening. RBA forecast inflation to tread lower with growth to be below trend and acknowledge peak labor market. We remain our call for a final 15bps hike whenever CPI spikes in the coming months.
RBA held the cash rate at 4.1%, echoing our forecast but to some market participant's surprise. Our forecast of 15bps hike remains as it seems the statement has left the doors open for more tightening to come before the end of year. The key statement of "Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will depend upon how the economy and inflation evolve." has changed some wordings to "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." The change in wordings doe not indicate a change in monetary policy direction as some market participants are now anticipating but seems to suggest RBA have some more tightening in the pipeline and ready to dish them out when inflation spikes.
The decision is in line with RBA's rhetoric in the past quarter when they switch to become more data dependent and is patient to assess the lagging effect of cumulative hikes yet keeping a close eye on inflation dynamics. We kept our forecast of terminal rate at 4.25% by year end 2023. RBA's commitment towards battling inflation has not faded with their wordings on 6% inflation being too high, especially highlighting the strength in service CPI. Yet, the room for RBA to further tighten while balancing economic growth remains minimal and we only see the RBA to tighten one last time whenever CPI spikes in the coming month. The household balance sheet has been restricted by mortgage cost and inflationary living pressure, while business are facing the tightest financial conditions in months, alongside peaking labor market. Thus, the RBA has to be very careful with their tightening steps.
Elsewhere, RBA is acknowledging economics growth to be below trend with private consumption and investment likely soft in the coming months. It is likely RBA will remain CPI sensitive in the future RBA meetings to choose whether to be on hold or dish out the remaining 15bps hike.