RBA Preview: Copy and Paste
The RBA meeting on Mar 19th will keep rates on hold as the latest monthly CPI meets estimate but remain above the RBA's inflation target range. The RBA would continue to suggest data dependency be their guide in coming rate decision. We believe there will be no change in forward guidance as CPI is remains above RBA's target range and do not see an imminent cut.
The RBA is going to keep the cash rate on hold at 4.35% as per our forecast that rate decision will be dependent on inflation. 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." will be staying and suggest RBA continue to keep the door open for tightening if CPI spikes. The rhetoric seems to suggest the RBA is tilting towards holding but will let data guide their action as they will act to make sure inflation is back to target range in 2025.
The decision is in line with RBA's rhetoric after they switch to be data dependent and stays 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 . It will be welcome by the RBA as they tilted towards no tightening with the Australian economics growth will be slowing in 2024 if inflation goes along with the trajectory of forecast. We maintained our forecast of terminal rate to be 4.35% with no more hikes in sight. RBA has removed previous wordings of "Inflation in Australia has passed its peak but is still too high and will remain so for some time yet."in the statement which is viewed as a dovish tilt by market participants. Yet, we do not think the RBA has a specific hawkish nor dovish take at the moment because they are simply being data dependent. But 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.
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.