The RBA doesn't like making major calls when it comes to the outlook of the cash rate (at least not anymore), but a huge change in attitude at the March cash rate meeting suggests it may well be done with rate hikes following a third consecutive rate hold.
After the February meeting where their long-term 2024 forecast was for two potential rate cuts, the RBA changed their language in what has been a key phrase since the RBA starting rate hikes in May 2022. From saying “a further increase in interest rates cannot be ruled out” for the best part of two years, the statement changed in March. “The board is not ruling anything in or out,” the release read, which has had many markets pricing in a winter rate cut, and journalists quiz Governor Bullock on when rates will come down.
There now won’t be an RBA meeting until May, with April falling off the calendar in the RBA’s new eight meetings a year instead of 11.
As always we’ll try and unpick both what the RBA is thinking, where inflation is at, and what the banks and experts are saying.
It was another summarised statement from Governor Bullock, who got right to the point. The statement opened differently to other months, with a number of further insights included.
“Recent information suggests that inflation continues to moderate, in line with the RBA’s latest forecasts,” the statement started with.
“While there are encouraging signs that inflation is moderating, the economic outlook remains uncertain. The December quarter national accounts data confirmed growth has slowed. Household consumption growth remains particularly weak amid high inflation and the rise in interest rates.”
Everything else was status quo (favourable signs in inflation abroad, services inflation sticky etc etc) up until the end of the statement. As mentioned earlier, the statement took away the notion that further interest rates might be necessary.
They also removed the dooming ending of “and will do what is necessary to achieve that,” a sentence which has concluded statements for what feels like a lifetime for mortgage holders.
Bullock’s press conference, the second in the new era ushered in in 2024 where the RBA Governor takes questions from journalists, once again opened with a statement, and another focused on inflation.
“We are making progress in our fight against inflation, but it does remain high,” Bullock said.
“As we've discussed before, in fact at this previous press conference, it [inflation] really is the big challenge in front of us. It confronts borrowers, renters, savers, retirees, it hurts everyone, and that’s why it’s so important we get it back into the target band of two to three per cent.”
She said the recent data suggests we are on the right track, but the interest rate path that best ensures we bring inflation back to garget does remain uncertain.
“What we need is greater confidence that inflation will return to the target band in a reasonable time frame and will stay there.”
Taking questions from journalists, Bullock was first asked about the aforementioned change of language. Her rhetoric throughout the press conference was that they're “not ruling anything in or out.”
“We changed the language in response to some data which has demonstrated to us that we are still broadly on the path we thought we were on, so we’re not confident enough to say we can rule out further interest rate changes, but we do think that we are on the path to get ourselves back to inflation target within our forecast period.”
Bullock was asked whether a rate cut was considered, and what data they would have needed to see to have taken a cut.
What we need to consider a rate cut is really to be much more confident that inflation is coming back into the band in the future. The central forecast has it not coming back into the band by 2025. If we were to see some acceleration and get some more confidence that we are overachieving there then possible rate cuts might be something on the agenda. At the moment we’re not seeing that, we’re at a position where we’re cautious, we want to wait and see, as I said, risks on both sides, and we need to be conscious of that.
The headline is inflation is falling, pretty rapidly, and importantly quicker than banks, economists, and most importantly the RBA, were predicting. It is the speed of the decline in inflation which is fuelling the fire for potential rate cuts toward the end of this year. Since the crucial quarterly update in January which showed December 2023 quarter inflation at 4.1% (below economists 4.3% forecast and down from 5.4% in the September quarter), monthly updates have been equally as positive.
Inflation in the month of January was 3.4% year on year, the same as the month of December and below the 3.6% forecast.
The next inflation update will be March 27, which will give inflation figures for February. The Board will likely wait until the more important quarterly inflation data sets before making any decision to cut rates.
ANZ is expecting inflation to return to the target band of between 2 to 3% by the end of this year, while NAB has inflation finishing 2024 at 3.1%, before falling into the middle of the RBA’s target band by the end of 2025.
Almost three-quarters of panellists in Finder.com.au’s RBA Cash Rate Survey believe the recent inflation numbers are not enough to bring forward a cash rate cut.
One in four don’t think the RBA will start cutting rates until 2025. There was an even split between whether the RBA will make the first cut before or after September. Only one in 10 experts believed there would be a cut in May.
CoreLogic Asia Pacific Research Director Tim Lawless says that while the timing of an RBA rate cut remains uncertain and dependent on inflation outcomes, the decision to keep rates at the same level will be a boost to confidence in the housing market.
“Historically we have seen a close relationship between consumer sentiment and the volume of home sales,” Lawless said.
“Following the 6.2% rise in the February consumer sentiment reading from Westpac and the Melbourne Institute, a further lift in confidence could be accompanied by a rise in home purchasing. This could add to housing demand that has already remained quite resilient despite the higher interest rate environment and cost of living pressures.”
Eleanor Creagh, PropTrack Senior Economist, echoed the sentiment.
“The decision by the Reserve Bank to hold the cash rate steady in March will maintain both buyer and seller confidence.
“Looking ahead, the next move for interest rates is likely to be down. Despite a weaker outlook for the economy, the positive tailwinds for housing demand and a slowdown in the completion of new homes are likely to offset the impact of reduced affordability and a slowing economy. As a result, prices are expected to lift further in the months ahead, particularly while the expectation remains that interest rates will move lower in late 2024.”
Financial markets are pricing in the first rate cut in August, but the Big Four believe it will come a little later than that.
Westpac is sticking with September as the first rate cut. Their Chief Economist, former senior RBA staffer Luci Ellis, says at that point, the RBA will have the full suite of data for the first half of 2024, including productivity and labour cost growth.
“Assuming things continue to pan out as expected, it will then have enough assurance that inflation will continue to decline on the desired trajectory. That will allow the Board to reduce some of the tightness in the stance of monetary policy and preserve more of the gains on employment,” Ellis said.
ANZ believe the RBA will shift to a neutral stance by the May meeting. They are remaining steadfast in their view that the first cut will be in November, however they opened the door to a rate cut earlier, given “current evidence of inflation moderating.”
“That said, we think the Reserve Bank will be cautious in declaring victory against inflation and may prefer to wait until the annual change in inflation has come back within the band, which we expect in the September quarter 2024 for headline inflation,” ANZ Economist Adam Boynton says.
Boynton suggested the RBA may also want to wait and see how consumers respond to the tax cuts and any additional fiscal easing in the federal budget.
NAB’s view is that the first cut will still be in November. They expected gradual rate cuts to bring the official cash rate to around 3% by the end of 2025.
“The decline in inflation over recent months has occurred slightly more quickly than the RBA expected,” NAB’s most recent release stated. They said the RBA is unlikely to get a clean read of price pressures until the Q2 CPI release in late July.
CommBank, the nation’s biggest lender, doesn’t update its forecasts as regularly as the rest of the big banks. Their last update in January had them pencilling 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.
AMP Senior Economist Shane Oliver says the cut could come as soon as June.
“The RBA is likely to still be waiting for more confidence regarding the fall in inflation at its March but the combination of slowing growth, rising unemployment and falling inflation should see it in a position to start cutting at its June meeting (if not then in August)."
Analysis by Canstar found that if the official cash rate did drop toward that 3% mark, and banks followed suit and cut mortgage rates at the same time, then the average mortgage holder could save up to $6,825 a year, based on a $600,000 loan at a current mortgage rate of 6.9%.
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