RBA Review: Holding as per forecast

The RBA has kept the cash rate on hold at 4.35% and forward guidance to be data dependency leading the future rate path as per our forecast. 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 changed to "The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out.". While market participants are reading such change in forward guidance to be hawkish, the forward guidance seems to only suggest data dependency remains and door remains open for tightening. We do not see the RBA to hike further because the room to balance between economics growth and inflation dynamics are minimal.

The decision is in line with RBA's rhetoric of being data dependent. The Q4 CPI slowed to 4.1% y/y from 5.4% in Q3 and missed estimates at 4.3%. RBA welcomes the data and acknowledges inflation moderates but suggest inflation remains too high above 4%, thus kept the door open for more tightening. They are also aware of that cumulative hikes is bringing balance between economics growth and inflation with tight labor market not inspiring a rapid wage growth. We maintained our forecast of terminal rate to be 4.35% with no more hikes in sight. We do not see the RBA having a specific hawkish nor dovish take because they are letting CPI take the wheel in rate decision. But the room for RBA to tighten without significantly hindering economic growth is small. The household balance sheet are restricted by mortgage cost and inflationary living pressure while business are facing the tightest financial conditions in years. 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 highlights the uncertainty around global outlook and how the Australian economy reacts to high rate, given the complexity of inflation dynamics towards different household and business. Geopolitical tension and service inflation captured their eyes in the February meeting. This warrant caution to market participants that rate decision in the future meetings will remain data sensitive.