How things can change in a month or two. At the last RBA meeting in March, there was so much optimism on inflation, you’d be hard pressed to find an expert or economist that was forecasting anything but an interest rate toward the end of this year. The data was so strong in fact that there were calls for the RBA to cut the interest rate as early as June.
Fast forward two months and sticky inflation data for Q1 2024, and markets started to price in a rate hike.
No such movement at the May meeting however, when the RBA kept rates on hold at 4.35 per cent for the fourth consecutive month.
As always, we’ll try and unpick the recent data, have a look at the latest sentiment and commentary from the banks, and try and unpick what’s happening in the topsy-turvy world of interest rates.
After a break in April when no meeting was observed, the May meeting gave RBA Governor Michele Bullock a chance to address the growing concerns of inflation.
The overarching sentiment from the RBA was obvious. Several times throughout the statement there were mentions of inflation declining more slowly than expected.” In fact it was the opening sentence of the statement.
“The persistence of services inflation is a key uncertainty. It is expected to ease more slowly than previously forecast, reflecting stronger labour market conditions including a more gradual increase in the unemployment rate and the broader underutilisation rate.”
Another addition in this month's statement was that “household consumption growth has been particularly weak as high inflation and the earlier rises in interest rates have affected real disposable income.”
“In response, households have been curbing discretionary spending and maintaining their savings. Real incomes have now stabilised and are expected to grow later in the year, supporting growth in consumption. But there is a risk that household consumption picks up more slowly than expected, resulting in continued subdued output growth and a noticeable deterioration in the labour market.”
The statement this month reintroduced a reference to economies overseas.
“There also remains a high level of uncertainty about the overseas outlook. While there has been improvement in the outlook for the Chinese and US economies, and many global commodity prices have picked up, geopolitical uncertainties, including those related to the conflicts in the Middle East and Ukraine, remain elevated.”
There was an optimistic start to the press conference for Michele Bullock. Despite calling inflation “bumpy”, and suggesting “we must continue to be vigilant about the continued risk of high inflation,” Bullock did say that “we believe we have rates at the right level to return the inflation to the target range next year.”
Bullock ended her three-minute opening statement by saying “We‘re watching the economy very closely, and we will adjust policy as needed. We can not let high inflation take hold.”
Second question asked whether the board is considerably more worried about inflation than they were six weeks ago, and if they were, why didn’t they raise rates.
Bullock spoke to the November rate hike, the last time the RBA hiked rates.
“At the time we thought the risks had shifted a little bit to the upside and we were taking a little bit of insurance. It’s true that the data toward the end of last year and early this year led everyone to think it’s okay now. I think we’ve alway felt it was a bit too soon to declare victory, and I think the numbers in recent weeks have demonstrated that for us. We think policy is restrictive, we don’t think we necessarily have to tighten again, but we can’t rule it out. If we have to, we will. If we really think that inflation is going to be persistent and significantly above our forecasts we will tighten again.”
Bullock suggested there might be some wiggle room in the timeline to get inflation down to within the RBA’s band of two to three per cent by mid next year.
“At the moment, we still think we can come back into target range by 2025. We have been discussing with the board what is the tolerance for that. We’re not putting any numbers on that yet. I’d have to say that we’re a little reluctant to say one month here one month there, but if we saw that inflation expectations were starting to shift and it was to take markedly longer to come back into target, then we might have to be thinking about whether or not there needs to be an interest rate rise, but at the moment that’s not our central forecast.”
With the Statement by the Reserve Bank comes the Statement of Monetary Policy (SoMP), where the RBA forecast themselves but down their base case scenario. Bullock has long said the scenarios that the Board have to produce, and are not forecasts.
The biggest change in the SoMP was that the RBA now has a base case for inflation to be at 3.8 per cent by the end of 2024 instead of their previously forecasted 3.2 per cent.
Life was good in March. The monthly Consumer Price Index (CPI) continued to show signs of cooling, after quarterly data for Q4 2023 showed inflation had dropped from 7.8 per cent in Q4 2022 to 4.1 per cent.
However, despite inflation continuing to slow, the data for Q1 2024, released at the end of April, showed a slowdown in the slowdown. The CPI was 3.6 per cent over the year to the March quarter, down from the aforementioned 4.1 per cent over the year to December, but importantly above the expected 3.5 per cent annual rise.
Not only was there a year on year slowdown in the slowdown, the biggest issue was the rise in the March quarter, not looking compared to the same time 12 months ago but to the quarter prior. The December 2023 quarter saw just a 0.6 per cent rise in inflation, but the March 2024 quarter rise in inflation was one per cent, much higher than the 0.8 per cent markets forecasted.
The next CPI release will be on May 15 which will show CPI for April. While a worthwhile look, the monthly data only includes around two-thirds of the CPI basket each month. It has data on goods services, including most food items, alcohol, tobacco, fuel, holiday travel and accommodation, but not on services, which includes rents and energy bills. It is services inflation that has proven difficult to control, not only in Australia but globally.
The next quarterly release for Q2 2024, which will include both goods and service data, will be released on July 31, just two weeks before the RBA’s August cash rate call.
While the Big Four banks were surprised by the inflation data for Q1 2024, they didn’t go as far as suggesting there will be a rate hike.
Westpac’s Chief Economist Luci Ellis, a former senior staffer at the RBA, said that with the inflation surprise in the March quarter and some further upside possible in the June quarter, the outlook for rate cuts in Australia has been pushed out, much like it has in the US.
“The forward-looking parts of the statement continue to emphasise that the Board is not ruling anything in or out in terms of future policy. While there have been upside surprises in recent inflation and labour market data, these occurred in a context of weak domestic demand and a trajectory for inflation that is still clearly downwards.”
Ellis says overall, they see the policy decision as poised.
“As the Governor noted in the media conference, it is hoped that they will not need to raise rates further, but they will act if needed. Likewise, our house view is that the most likely outcome is unchanged rates for a period, but further upside surprises will change the calculus. “
ANZ said the post-meeting statement was “less hawkish than expected”, and they were surprised by the upwards revision of the RBA’s inflation forecast for the end of 2024.
“We are conscious about reading too much into RBA forecasts and communication. Still, the combination of the less hawkish than expected language in the post-meeting statement and the larger than expected upward revisions to the RBA’s inflation forecasts over the next few quarters implies the hurdle to another hike could be higher than markets have been expecting heading into this meeting,” ANZ’s Adam Boynton and Madeline Dunk said.
NAB is yet to update their view on the lay of the land, while Commonwealth Bank, the nation’s largest lender, is generally quiet when it comes to talking about interest rates unless probed.
Every expert in Finder.com.au’s RBA Cash Rate Survey correctly forecasted rates would be kept on hold in May.
Andrew Wilson from My Housing Market said the data clearly points to increased likelihood of higher near-term RBA rates with continued higher housing, fuel and energy costs to drive more rises in inflation and well above target range.
He said the RBA is set to play catch-up after leaving rates too low for too long in 2023 - and can only rationally reach its target by significantly reducing demand in a still booming economy.
REA Group Director of Economic Research, Cameron Kusher, believes the RBA will re-enter a hiking bias due to the stronger than anticipated CPI numbers, however he doesn’t see them hiking yet.
Eleanor Creagh, PropTrack Senior Economist Eleanor Creagh said the sustained pause in interest rates reflects the expected easing in inflation still to come as the economy, businesses, and consumers continue to adjust to the full impact of significant interest rate tightening delivered since May 2022.
“Although inflation has not fallen as quickly as expected early in the year, retail sales and consumption are weak, and consumer sentiment remains low,” Creagh said.
“Despite higher-than-expected inflation in the March quarter confirming the challenging journey towards lower inflation, the Board remains forward looking, anticipating further decline in inflation by the end of the year.”
The majority of banks had forecasted a cut in September, however the recent inflation data pushed forecasts out further.
ANZ was the only bank to forecast a November cut. Now Westpac, CommBank and NAB have followed suit.
“We continue to favour November for the start of the easing cycle, although the risks remain skewed toward that being delayed into 2025 and being shallower than we are forecasting,” ANZ’s update following the cash rate hold noted.
Despite CBA not often publicly speaking about their forecasts on interest rates, their head of Australian economics, Gareth Aird, had to come out following the recent CPI release and change the bank’s rather dovish forecast of three interest rate cuts in 2024.
The cut forecasts now from three of the four big banks would take the official cash rate down to 3.1 per cent by the end of 2025 with one cut in 2024 and a further four cuts, one per quarter, in 2025. If ANZ’s forecast proves to be correct, it will sit at 3.6 per cent by the end of 2025..
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