RBA Reaction: Inflation Moderating But Still Too High

RBA Reaction: Inflation Moderating But Still Too High
Following the latest RBA rates decision, Mutual Limited’s CIO Scott Rundell looks at the latest sentiment and the outlook.

The RBA met today and as expected by markets and the vast majority of strategists, they left the cash rate unchanged at 4.35%.  The tone of the statement was also broadly unchanged in that the board acknowledged inflation was moderating, but remained too high.

Services inflation remains stubborn, and wages growth and unemployment levels are not conducive to priced falling.  A modest change in the statement was recognition that inflation is falling more gradually than expected.  That statement shouldn’t come as a surprise to anyone with an eye on the data, or anyone who pays the household bills, does the grocery shopping etc.  Geopolitical uncertainties earned some real estate in the statement, but it seemed more like an afterthought than a real concern vs the prior statement.

The board still expect inflation to return to their 2 – 3 per cent target range by the second half of 2025, and be back around the mid-point in 2026 at some stage.  They’re certainly giving themselves a very long run-way to be work, so they have scope to be patient and allow the +425 bps of rate hikes they set to do their thing.

Also read: Fed Takes Slight Hawkish Shift

Nonetheless, there was a sense of urgency to the statement…”the Board expects that it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks.”  This statement of vigilance is a new addition, and while it might suggest a willingness to go more restrictive in policy settings, I honestly doubt they will.  They’ll likely just talk tough again.  As with the last meeting, the Board is not ruling anything in or out.  So, theoretically rate hikes are somewhat possible, but again I’d argue not probable unless the inflation data really turns to custard.

Market reaction was noticeable and directionally suggesting less hawkish than expected.  Three-year government bond yields dropped 8 bps in the half an hour post the decision, while ten-year yields were 5 bps lower.  We also observed a 4 bps drop in the 90-day bank bill rate, back to 4.39. Moments prior to the release of the decision, the swap market was pricing in a rate hike, likely around September.  As of now, post the meeting, a rate hike is well and truly off the menu, but then again, a cut is also not probable.  Everyone just needs to accept that rates will stay elevated for quite a while….pretty sure I’ve seen that written somewhere before.