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RBA holds the official cash rate at the final RBA rate call of 2023

December 11, 2023

RBA holds the official cash rate at the final RBA rate call of 2023

The December RBA rate announcement was a little bit more straightforward than the last few rate calls under new Governor Michele Bullock. Bullock kept rates on hold at 4.35% at the last RBA meeting of 2023. 

Of course this will be the final RBA meeting until February, with the traditional annual pause in January. Next year the RBA won’t be meeting every month, instead they’ll only be meeting eight times a year, with the months of April, July and October no longer on the calendar, along with January.

What else will change next year is how the rate announcement will be delivered. Accompanying every rate call, which will still be held on the first Tuesday of the month, will be a press conference, held an hour after the 2.30pm release. Minutes will still be released two weeks after the announcement, but the hope is the press conference will shed more light on what the RBA is seeing and thinking in a more timely manner.

Bullock’s start to governance toward the back end of 2023, taking over from Philip Lowe for the October rate call, has been a more problematic one than first anticipated. It looked like the former Deputy Governor was walking into an environment where the RBA may have already shut down inflationary pressures by hiking rates 400 basis points in 18 months. There were four months of rate pauses from July, however a spike in inflation saw Bullock push rates higher in November. 

The latest data available showed a positive outlook for inflation, but Bullock has indicated the RBA will be taking a “data-led approach”, so they’re at the mercy of the periodic data releases, namely quarterly inflation.

As always, we unpick what the RBA has said since their last rate hike, and what they’re saying now, as well as the forecasts and opinions of Australia’s big banks and economists.

What did Michele Bullock say at the December meeting?

It's starting to become refreshing to see that Michele Bullock is happy to throw out the rule book when it comes to the Monetary Policy Decision Statement. Under the old regime, it became laborious to pick out slight changes in tone, or removal of single words to try and read what the RBA is thinking. Bullock is happy to write a completely new script based on what’s happened in the month prior, which is what we all want to see.

Much like many banks have suggested, Bullock said the information received on the domestic economy has been “limited” since the November rate hike, but it has been “broadly in line with expectations.”

“The monthly CPI indicator for October suggested that inflation is continuing to moderate, driven by the goods sector; the inflation update did not, however, provide much more information on services inflation,” Bullock said, adding that overall, measures of inflation expectations remain consistent with the inflation target.

Bullock noted the wage growth pick up, which tends to drive inflation because it puts more money in people's pockets which translates to spending, however she also added that it was expected given the data set captured the earlier Fair Work Commission decision on award wages which saw the minimum wage by 5.75%.

“Wages growth is not expected to increase much further and remains consistent with the inflation target, provided productivity growth picks up.”

Conditions in the labour market also continued to ease gradually, although they remain tight.

Again it’s not been common for the statement to shed further light on their last rate call. That’s covered in the minutes released two weeks after the rate announcement. But Bullock did it anyway.

“This decision reflected the Board’s view that progress in bringing inflation back to the target range of 2 to 3 per cent was looking slower than earlier forecast,” Bullock said.

Bullock again concluded by saying “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.”

What’s happening with inflation?

The surprise spike in inflation in the September quarter was the driving force behind the November Cup Day rate hike. The 1.2% quarterly inflation jump, higher than the forecasted 1.1% rise, meant the annual inflation rose 5.6%. It was down from the 6% between June 2023 and June 2023, however it still wasn’t falling at a speed to bring it within the RBA’s target band of 2-3% by mid-2025.

The monthly inflation numbers released at the end of November, for the month of October, however made for more positive reading. Inflation in October rose at an annual pace of 4.9%, much less than the 5.6% in September. Markets had forecasted the monthly inflation figure to be 5.2%.

While encouraging news which will have helped the RBA make the decision to hold rates, the figure can partly be taken with a pinch of salt. Not all data is collected in the monthly inflation data, around 70% of it.

Last month Bullock revealed the RBA’s upwards revision of inflation over 2024, from 3.3% to 3.5%.

The next monthly inflation data is released January 10, which will show figures for spending across the country in November. On the same date, January 31, the ABS will release both consumer spending for the month of December, and the whole of the December quarter. This sole piece of data is fully expected to completely influence the RBA’s decision as to whether they hike rates a week later or not.

What the banks are saying

The big four banks correctly predicted the cash rate call, however all are calling the February rate announcement “live”.

Westpac’s Chief Economist Luci Ellis, the former RBA head of the financial stability department and then the assistant governor (economic), said the RBA has given itself time to assess. Ellis said if inflation does not decline as the RBA intends, the Board will respond with increased rates, adding however that “this is not the most likely outcome.”

Ellis interestingly pointed out that only recently are we starting to see the impacts of rate rises from 12 months ago start to impact inflation.

“The Board would be aware that further rate increases from here will have much of their impact at least a year from now – by which time inflation should already be at or close to target,” Ellis noted.

“The October CPI indicator was lower than market forecasts and, we believe, the RBA’s expectations. Much of this surprise was in noisy components such as fuel and holiday travel, which the RBA will tend to look through.”

Despite calling the February rate decision ‘live’, Ellis said it is Westpac’s view the cash rate has peaked. They believe the first rate cut will come before September 2024. They then expect another cut before December and another one in each of Q1 and Q2 2025 to take the cash rate down to 3.35 per cent by June 2025.

The same sentiment of the cash rate already hitting the ceiling is held at ANZ. Their economic update following the RBA December hold suggesting 

“Our view is that the cash rate will stay at 4.35% for some time before a modest easing cycle starts at the end of next year,” ANZ Head of Australian Economics Adam Boyton said.

“Before we get to that point, however, the risk of further RBA tightening cannot be ruled out.”

Boynton says ANZ look at what the Fed is doing in the US given the “synchronous nature of the current global economic cycle.”

“ANZ expects the Fed will commence an easing cycle in Q3 2024, which increases the likelihood that the RBA eases late next year too.

“Fed easing isn’t an automatic trigger for the RBA, as domestic conditions also need to be conducive. Still, growth and inflation in the US slow enough to enable the Fed to ease would help set the conditions for the RBA to also cut, particularly given the synchronous nature of the current global economic cycle.”

ANZ expects the RBA to hold into next year, with the first cut coming before December 2024 and the second cut by March 2025 to take the official cash rate down to 3.85 per cent.

NAB however expects there to still be another rise, in February.

“We see any further moves on the cash rate as fine-tuning rather than the RBA needing to take the cash rate materially higher,” NAB’s economist team said in late November.

“There is still some impact of prior tightening to flow through, and we are well past the peak in inflation. From here, it is about the desired timeframe of the RBA to return inflation to target.”

NAB expects the official cash rate to peak at 4.6%, and then expect rates to hold until November 2024, pushing their forecast of an August 2024 rate cut.

Commbank doesn't update as regularly as the other three banks.

What the experts are saying

Over 80 per cent of experts in the RBA Cash Rate Survey predicted a cash rate hold at the December meeting.

There were still a number of inflation concerns from economists and academics.

Andrew Wilson from My Housing Market predicted a rate hike, suggesting the RBA “needs to play catch up following five premature rate pauses from May to October.”

Sean Langcake, Head of Macroeconomic Forecasting at Oxford Economics Australia, said the Q3 CPI data raised enough concerns about inflation for the RBA to reluctantly resume the hiking cycle. 

“We don't see a single hike as being enough to allay their concerns given the breadth of underlying inflation pressures. The board could wait until February for another CPI print. But they would be better off cracking on with the job in December," Langcake said before the rate hold.

Eleanor Creagh, PropTrack Senior Economist said conditions in inflation are expected to continue to soften as the full impact of monetary tightening to date is yet to be felt and inflation is likely to continue moving lower as a result. 

“The RBA has been clear that it has a low tolerance for allowing inflation to return to target more slowly than currently expected. This means it’s likely the cash rate has peaked in this current tightening cycle, although should inflation data indicate inflation is returning to target at a slower pace than currently expected, the risk of another lift in February 2024 remains.”

What’s happening to house prices?

There cooling of house price growth is continuing, but CoreLogic’s National Home Value Index still saw growth in November for the 10th consecutive month. Sydney and Melbourne were the capital cities who are leading the softening, with the likes of Brisbane, Perth and Adelaide still charging on.

South East Queensland continues to be bullet proof. Dwelling values in Brisbane rose another 1.3% to be 3.9% over the quarter and 11.9% annually. Generally houses outstrip units for growth, however the growth numbers in Brisbane have been fairly even over 2023 (+12.1% for houses and +11.1% for units).

The Gold Coast has had a similar 2023. Dwelling values have risen 9.2%, with unit growth (+9.5%) outstripping houses (+9%).

CoreLogic Research Director Tim Lawless puts the dampening of growth down to the Cup Day rate hike, as well as advertised supply levels increasing in some cities, as well as affordability constraints given the higher interest rate environment we’re in compared to 18 months ago.

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