Market Wire: RBA: Vigilant to the risks
At first glance the RBA played a rather straight bat at today’s policy meeting. The RBA cash rate was kept at 4.35%, as widely expected, and its forward-looking guidance was unaltered. In contrast to some market thinking that the RBA could revert to its more explicit rhetoric that “a further increase in interest rates cannot be ruled out”, the Board simply repeated its mantra that when it comes to the future policy path it is “not ruling anything in or out”. After its strong run the AUD has slipped back a little (now ~$0.6590) with the RBA failing to exceed the markets ‘hawkish’ expectations. We had been flagging this as a high chance in our recent commentary, as when it comes to markets outcomes compared to what is factored in is what matters. But we think this should be a short-term AUD story.
From our perspective a read through of the RBA’s comments and updated forecasts suggest it may not take many more positive labour market or inflation surprises to get another hike over the line with relatively high interest rates set to be in place for some time. Indeed, when asked RBA Governor Bullock stated the Board discussed the option of raising rates at this meeting, and that the recent flow of data means policymakers need to stay ‘alert’ and ‘vigilant’ to the risks. As the RBA also continues to stress getting inflation to target within a “reasonable timeframe” is the Board’s “highest priority”. And while inflation is easing, it is still high, with the deceleration coming through “more slowly than previously expected”. This point was illustrated in the RBA’s new projections.
The RBA’s near-term forecasts for inflation were revised a bit higher, and unemployment was revised a touch down. Australian headline inflation is seen at ~3.8%pa over the rest of 2024, while core inflation is slightly lower. Inflation continues to only be forecasted at the middle of the RBA’s target band by June 2026, however this reflects a softer growth outlook stemming from a ‘technical assumption’ (derived from market pricing) that has fewer rate cuts over the horizon relative to the last Statement on Monetary Policy put out in February. Below trend GDP growth is anticipated over the next few years with household consumption going backwards in per capita terms over 2024 as higher mortgage rates and other cost of living pressures continue to bite. Only when real wages are assumed to become positive (i.e. late-2024/H1 2025) is household spending predicted to turn the corner.
Despite its post-RBA setback (which we had been anticipating, see Market Briefing: Softer US data pressures the USD), we continue to hold a positive medium-term bias for the AUD. In addition to a looked for revival in China’s economy as policy stimulus measures gain traction, and outlook for a weaker USD as US growth slows and the US Fed’s easing cycle comes closer into view, we have also long thought that the RBA would diverge from its offshore counterparts over the period ahead.
While it remains to be seen if the RBA hikes rates again, it should be viewed as a non-negligible risk. RBA rate cuts look to be some time away. The experience of Canada and NZ, where inflation is back at the top or within their target bands due to a weaker economy and higher unemployment, suggests a RBA cash rate (now 4.35%) closer to where the BoC (5%) or RBNZ (5.5%) got to may ultimately what is needed. Irrespective, we continue to believe that the stickiness in domestic inflation, a resilient labour market, incoming stage 3 tax cuts, and prospect of more cost-of-living relief at the May Federal Budget point to the RBA lagging its peers in terms of when it starts and how far it goes in the next global easing cycle. This appears more apparent from the RBA’s updated outlook. Diverging policy expectations between the RBA and others, and shift in yield differentials in Australia’s favour, should be a medium-term AUD tailwind, in our opinion.
Peter Dragicevich
Currency Strategist - APAC