RBA Preview: A Data Dependent Hold
The RBA meeting on Feb 6th will keep rates on hold as Q4 CPI continue to moderate after a brief spike in Q3. The RBA would suggest data dependency to be their guide in coming rate decision. We believe there will be no change in forward guidance as CPI is still far from RBA's target range.
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. This dovish language seems to suggest the RBA is tilting towards not hiking anymore but will let data guide their action as they are not sure where inflation may go in a short run.
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%. It is welcoming for the RBA as they tilted towards little further tightening with the Australian economics growth will be slowing in 2024. 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. 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.