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RBA holds at February meeting as rate ceiling reached

February 7, 2024

Finally, barring a seismic shift in data trends in the coming months, the RBA has finally finished their rate hike cycle. 

RBA Governor Michele Bullock kept rates on hold at the first RBA meeting of 2024, following consistently positive data releases over the last quarter.

It’s been a long and arduous 20 months for mortgage holders since the RBA put their foot on the rate hike accelerator just under two years ago, quickly hiking the official cash rate from 0.1 per cent in May 2022 to 4.1 per cent by June 2023. 

After a four-month pause, the RBA hiked rates once more, on Cup Day no less, to take the cash rate to 4.35 per cent. Following that hike, economists were on the fence as to whether another rate rise would occur, stating that the RBA would be led on the inflation data release in January. The monthly releases suggested it was going to be good news, but nobody had predicted how good.

The February meeting, the first of the new structure for 2024, presented an opportunity for Bullock to go past just the standard statement which accompanies every rate announcement. With the announcement came the Statement of Monetary Policy, which yielded more insights to comb through, and an hour later the RBA Governor held a press conference to talk through the Feb rate call.

We’ve unpicked everything the RBA has said, and what economists and experts are saying about the market.

What did the RBA say at the February meeting?

While there’s a lot of buzz around when interest rates might go down following recent economic data suggesting the country is heading in the right direction, Michele Bullock made sure feet were kept firmly on the ground in her statement.

There were “buts” and “howevers” throughout.

The statement opened with “inflation continues to moderate, but remains high.”

Bullock noted that goods price inflation was lower than the RBA’s November forecasts.

“It [goods price inflation] has continued to ease, reflecting the resolution of earlier global supply chain disruptions and a moderation in domestic demand for goods.”

She called out however that services price inflation declined at a more gradual pace, in line with the RBA’s earlier forecasts, but that still remains high. 

“The outlook is still highly uncertain” was the next paragraph, maintaining Bullock’s reserved approach to the recent data.

On goods and services inflation, Bullock referred to the activity overseas.

“While there have been favourable signs on goods price inflation abroad, services price inflation has remained persistent and the same could occur in Australia.”

She also noted the high level of uncertainty around the outlook for the Chinese economy, as well as the implications of the ongoing conflicts in Ukraine and the Middle East. 

Domestically, she said there are uncertainties regarding the lags in the effect 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 the labour market remains tight. 

She said the outlook for household consumption also remains uncertain.

“The Board needs to be confident that inflation is moving sustainably towards the target range. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.”

What did the Statement of Monetary Policy address?

The Statement of Monetary Policy (SoMP), released at the same time as the RBA announcement, revealed the RBA is forecasting two rate cuts in 2024, which would bring the cash rate down to 3.85 per cent.

“The cash rate is assumed to move broadly in line with expectations derived from surveys of professional economists and financial market pricing,” the SoMP read.

“Using this methodology, the cash rate remains around its current level of 4.35 per cent until mid-2024 before declining to around 3¼ per cent by the middle of 2026. This cash rate path is a little lower than at the November Statement.”

Bullock however noted in the media conference, which we’ll go into more detail on shortly, that forecasts are just that, forecasts.

“There is a cash rate assumption in the forecasts, there has to be. We need some sort of assumption to work with, but I emphasise the word assumption. It isn’t a commitment, it isn’t a forecast, it isn’t even an expectation, it’s something to work with.”

Bullock said as they move out with their forecast, it gets more uncertain.

“We’ve already emphasised there could be risks on the upside, there could be risks on the downside. Now, if the risks on the downside present themselves, then we have the option of cutting interest rates. If the risks on the upside eventuate, then we might have to look at whether or not we have to increase again.”

It is a revised assumption of the cash rate from the November SoMP when the RBA expected rates would peak at around 4½ per cent before gradually declining to 3½ per cent by the end of 2025.

The February SoMP also had revised inflation expectations. Forecasts now for June will be that CPI will be 3.3 per cent instead of 3.9 per cent forecast, and by the end of 2024, inflation will be at 3.2 per cent and not 3.5 per cent. Inflation will fall into the RBA’s target band of 2-3 per cent, the Board forecast, by the end of 2025, where it will sit at 2.8 per cent.

What did Bullock say at the press conference?

“We want inflation in the background again.”

That was one of the key takeaways from Bullock’s 44-minute media conference, where she first spoke about the state of the economy, and then fielded questions from the onlooking media who were mainly focused on interest rate movements.

Bullock opened by calling the press conference a “Great opportunity for me to outline the board’s decision to the Australian community.”

She talked about the history, and the cash rate cuts back to historic lows of 0.1 per cent through the once in a lifetime pandemic, to what she called an “emergency setting.”

“It was never going to stay there forever,” Bullock said.

She said now the fight is with inflation.

“The point about this is inflation hurts all Australians. For many Australians, for the past two decades prior to the pandemic, inflation was about two per cent, it was in the background. People weren’t focused on it. That’s not the case anymore, everyone is focusing on inflation.

“For that reason, we’ve seen a very rapid rise in interest rates over the last 18 months to two years, and it’s been rapid because first of all we had to remove all of that stimulus we had from the panic, and then we had to obviously address inflation which means we had to get interest rates into restrictive territory.

“The Board does understand that people are doing it tough, and a big reason for that is inflation, that’s why it’s really important we get inflation down. We’ve made good progress, but the jobs not done. We want it in the background again.”

The ABC’s Peter Ryan asked, with softer GDP, inflation slowing faster than expected and the jobless rate tickling higher, if it was a mistake to raise the cash rate in November and if they’d overdone the rate rises.

“The short answer is that we didn’t make a mistake,” Bullock responded.

“All of this is based on risk, and risk management framework, in some sense. What we’re doing is trying to balance bringing inflation down and keeping inflation gains of the pandemic that we made which has been great. At the same time we don’t want inflation expectations to rise, which would make the job harder and ultimately be more costly. On that basis, the rise in November, the risks had shifted to the upside, and in order to mitigate some of those, to give a bit more assurance, that was the appropriate move at the time.”

Bullock reminded both the journalists in the room and onlooking Australians that the cash rate hasn’t gone up as far as other countries.

What is happening with inflation?

Inflation’s going down, and at a rate much faster than both the RBA and banks had been forecasting.

In the November SoMP, the RBA was forecasting inflation to be at 4.5 per cent in the December quarter. Instead it came in at 4.1 per cent, a difference so large it had everyone talking about the next cut.

The monthly inflation data, which doesn’t cover every category of inflation but still provides a more timely inflation update than having to wait for the quarterly update, is next released on February 28 for the January month of spending.

The real deal will be the April 24 release of the quarterly CPI, which could have economists scrambling to change their rate cut forecasts if there’s another surprising result to the downside.

What are the experts saying?

All 27 experts who took part in’s RBA Cash Rate Survey accurately predicted the cash rate hold at the February meeting.

The vast majority of the panel (93 per cent) believe the cash rate has peaked, but 85 per cent don’t think the first cut will happen until at least August.

Harry Murphy Cruise from Moody's Analytics said Australia's fight against inflation is coming along in leaps and bounds, giving the RBA some breathing room before they cut rates later in the year. 

“Progress will slow through 2024, as looming tax cuts will hand cash back to households at the exact same time the RBA is trying to take money out of the economy. That will delay Australia's first rate cut until September,” Murphy Cruise said.

Saul Eslake of Corinna Economic Advisory Pty Ltd agreed, saying, “The December quarter figures were good enough to rule out whatever little prospect there was of the RBA raising rates again.” 

Eslake went on to say that he didn’t foresee a cut at any meeting this year and compared the Stage 3 tax cuts due on 1 July to two 25 basis point cuts in terms of their impact on household cash flows.

What are the banks saying?

Westpac Chief Economist and former RBA senior staffer Luci Ellis says the case to raise rates from here is steadily losing traction. 

“We expect that over coming months, further declines in inflation and soft outcomes in the real economy will give the Board enough confidence that inflation will return to target on the desired timetable,” Ellis says, adding that they will therefore have scope to reduce some of the current restrictiveness of policy.

NAB Chief Economist Alan Oster says the bank doesn't see anything in the data yet that means rate cuts are imminent and the RBA is unlikely to move to an easing bias in the near term. 

“Rather, they will sit and assess the impact of previous increases and the evolution of risks for inflation which look to have squared up over recent months. Nonetheless, as a forward-looking central bank, the RBA will eventually need to move rates back towards neutral as inflation fades and unemployment continues to rise.

When will rates come down?

While the RBA’s seemingly central case is for rates to be cut twice in 2024, there are varying forecasts from the Big Four.

NAB was the only bank forecasting a rate hike in February, but changed their tune on the back of the Q4 CPI. They expect just one cut before the end of 2024, in November, before a further four cuts in 2025 to close the year at 3.1 per cent.

Westpac is still saying there will be two cuts in 2024, the first in September. They too forecast a 3.1 per cent cash rate by the end of 2025, with a rate cut in each quarter barring Q4.

ANZ still expects November to be the start of the easing cycle, although they note earlier cuts can’t be ruled out following the Q4 CPI. CBA hasn’t provided a recent update since January, importantly before the recent positive inflation figures. They had pencilled in a cut in September, before another two cuts in 2024 to take the cash rate down to 3.6 per cent. They then forecasted a further three cuts in 2025.

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