RBA – A Pause For Reflection

RBA – A Pause For Reflection
Following yesterday’s RBA rate pause, Mutual Limited CIO Scott Rundell shares his post mortem:

RBA July 2023 Monetary Policy Decision – a pause for reflection at 4.10%

Upon consulting the monetary policy runes and undertaking a reading of the chicken giblets, the RBA elected to leave cash rates unchanged today.   The accompanying statement was somewhat hawkish in that further policy tightening may be required, but the overall tone was similar to last month’s statement, which accompanied a +25 bp hike.  The decision to pause was inline with consensus expectations (median), and markets in general, although several of the major banks, three in fact, had a rate hike pencilled in.  CBA was the outlier with a pause expected.

Data flow since the June meeting has been light

Q1 GDP printed at +2.3% YoY vs +2.7% YoY as at the end of the prior quarter, which we deemed neutral for monetary policy.  Unemployment fell to 3.6% from 3.7% a monthly earlier, which is hawkish for monetary policy at face value.  The Monthly CPI Indicator printed at +5.6% YoY (headline), well below the +6.8% YoY print a month earlier, signalling a solid moderation in the growth rate of prices.  At face value dovish directionally, but levels still elevated vs RBA targets.  Although, if you strip away volatile items, the trimmed indicator was still elevated at +6.4% YoY vs +6.7% YoY previously.  Still moderating, but slowly.  Retails sales rebounded, +0.7% MoM vs flat a month earlier – also hawkish for policy settings.  Credit growth was stable. +0.4% MoM vs +0.4% MoM previously, although the annual growth rate slowed to 6.2% YoY from +6.6% YoY a month earlier – neutral for monetary policy.

Also read: Australian Economic View – July 2023

The statement wasn’t materially different from the June meeting, although this time around they felt the need to sit back and assess

Having read the June meeting minutes, that meeting could have gone the same way.  The Board acknowledged that inflation had passed its peak, but was still “still too high and will remain so for some time yet,” and “growth in the Australian economy has slowed and conditions in the labour market have eased, although they remain very tight.”  The reference to navigating a narrow path remains in place, but the board is still expecting the economy to grow while they try and get the inflation genie back in the bottle.  Household consumption remains an uncertainty, although recent house price strength will likely help, in a wealth sense at least.  As with the June statement, the RBA noted that “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.

Market reaction was somewhat abrupt

In bonds, 3Y yields were +8 bps higher leading into the announcement, at 4.07%.  An hour later yields were back at their opening levels, 3.99%.   The ASX 200 was marginally lower pre-decision, and then jumped +0.7%.  As to where from here, I doubt the rate hike cycle is done, there is more to come.  However, my base case of terminal rates reaching 4.60% is looking challenged, while the probability of my low side case of 4.35% eventuating has firmed.  The high side scenario of 4.85% is looking less probable than not.  Looking forward, the board will “continue to pay close attention to developments in the global economy, trends in household spending, and the forecasts for inflation and the labour market.”  Employment data and Q2 CPI is due out in a few weeks, with CPI forecast to come in at +6.3% YoY (vs +7.0% YoY in Q1), while unemployment is expected at 3.7% vs 3.6% last.  RBA forecast have Q2 CPI at +6.3% YoY also, but unemployment a smidge lower at 3.6%.  How these two data points play out will go a long way in determining whether we have a rate hike at the August meeting.