RBA Review: Rate as expected but forward guidance changed
The RBA meeting on Mar 19th has kept rates on hold but see a change in forward guidance, which seems to be preparing for a potential shift in monetary policy if data approves.
The RBA has kept the cash rate on hold at 4.35% as per our forecast. The current inflation picture does not support any change of monetary policy from the RBA with the latest CPI showing a 3.4% y/y growth.The key forward guidance statement of "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." has been changed to "The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.". The wordings may mean the same, RBA being data dependent, but the change in rhetoric seems to suggest that RBA would also consider easing if they see CPI to be returning to target range. RBA is forecasting inflation to be back in target range in mid 2025.
The decision is in line with RBA's rhetoric of being data dependent and patient in assessing the effect of cumulative hikes while keeping a close eye on inflation dynamics. The Q4 CPI showed a 4.1% y/y growth, slowing from 5.4% in Q3 and missed estimates at 4.3% and the latest February CPI bangs in estimate at 3.4% y/y, still above RBA's inflation target but align with their forecast . RBA will prefer not to further tighten because the Australian economy will be growing slower in 2024 and the room for RBA to tighten without significantly hindering economic growth remains minimal. 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. Preliminary data suggest that domestic demand will weaken significantly in Q1 2024, further weighing on RBA's decision to tighten more. 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. We maintained our forecast of terminal rate to be 4.35% before seeing two 25bps easing in H2 2024 .