The RBA left policy unchanged today, but there were some significant changes to the policy outlook. The Board will look past the short-term electricity subsidies and still sees inflation as too high and the labour market as tight. However, the RBA also seems to be softening its view on global growth.
Today the Board decided to leave the cash rate target unchanged at 4.35% and the interest rate on Exchange Settlement balances (bank reserves) unchanged at 4.25%.
Regarding the inflation outlook the governor's statement read: "In underlying terms, as represented by the trimmed mean, inflation was 3.9 per cent over the year to the June quarter, broadly as forecast in the May Statement on Monetary Policy (SMP). Headline inflation declined in July, as measured by the monthly CPI indicator. Headline inflation is expected to fall further temporarily, as a result of federal and state cost of living relief. However, our current forecasts do not see inflation returning sustainably to target until 2026. In year-ended terms, underlying inflation has been above the midpoint of the target for 11 consecutive quarters and has fallen very little over the past year."
In August, the RBA was concerned that the economy could not satisfy the level of demand, pushing up prices. Since then, total demand has remained resilient, wage pressures have eased "somewhat", but labour market conditions remain tight. "Taken together, the latest data do not change the Board’s assessment at the August meeting that policy is currently restrictive and working broadly as anticipated. But there are uncertainties. The central projection is for household consumption growth to pick up in the second half of the year as the headwinds to income growth recede – but there is a risk that this pickup is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market. More broadly, there are uncertainties regarding the lags in the effects of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand, and while conditions in the labour market remain tight.
"There also remains a high level of uncertainty about the outlook abroad. Some central banks have eased policy, although they note that they are removing only some restrictiveness and remain alert to risks on both sides, namely weaker labour markets and stronger inflation. The outlook for the Chinese economy has softened and this has been reflected in commodity prices. Geopolitical uncertainties remain pronounced."
"Sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority. [...] While headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high. The most recent projections in the August SMP show that it will be some time yet before inflation is sustainably in the target range. Data since then have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range".
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Fin-X Wealth View
We have previously commented that the RBA seemed to have an inexplicably rosy view of global growth. That appears to have evolved to a less bullish and more balanced outlook.
The statement also suggests that Australian demand and employment risks are skewed to the downside.
However, the focus remains squarely on inflation and the governor is resolutely dismissing cutting rates based on the temporary inflation reduction engineered by the Treasurer via the electricity subsidies.
For the RBA to cut rates, the labour market will likely have to soften further. The Assistant Governor (Economic), Sarah Hunter, warned of this in a recent speech.
The market is now pricing a roughly 50% chance of a cut by Christmas, which would likely require a substantial rise in unemployment or a sharp drop in global growth.
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