RBA Review: Change in wordings, no change in heart
The RBA meeting on May 7th has kept rates on hold and see a change wordings in forward guidance but not the meaning.
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 despite the latest quarterly CPI showing a 3.6% y/y growth, 0.2% above consensus. The key forward guidance statement of "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." 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 Board will rely upon the data and the evolving assessment of risks." but the meaning of data dependency did not change. RBA continue to forecast inflation to be back in target range in mid 2025 but indicated the path will not be smooth.
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. Bullock's remark on further tightening maybe needed if inflation stay high is followed by such is not RBA's central forecast. RBA will prefer not to further tighten because the Australian economy is showing early signs that growth will be 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.
RBA highlights service inflation continue to moderate slower than expected, household consumption weakens and global outlook uncertainty as key risk towards their forecast. 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 .