$A slides on Reserve Bank’s ‘doveish’ tone

Futures imply only a 1-in-10 chance of a rate increase to 4.6 per cent at the next RBA policy meeting in February. Before Tuesday’s meeting, they had ascribed a 1-in-3 probability.

The RBA’s reference in the statement on Tuesday of a moderation in the monthly consumer price index, combined with the removal of its usual wording that “inflation is still too high”, was taken by the market as signs the central bank was done raising rates even though it reiterated it would tighten again depending on economic data.

In November, the RBA lifted the cash rate for the 13th time following a four-month pause, saying inflation was too elevated.

“The RBA are reluctant hikers from here given they mentioned the monthly consumer price index slowdown,” said Angus Coote, co-founder of Jamieson Coote Bonds. “It is suggestive of a rate pause.”

The December-quarter inflation data, due late January, will be key in determining whether a February rate increase will be at play or mark the start of a rate pause that could lead to an easing cycle late next year.

Mr Coote predicted that rates have peaked and monetary easing will kick off in the second half of 2024.

Central banks globally appear to be approaching the end of their tightening cycles, as inflation trends downwards and labour markets gradually cool under the pressure of higher interest rates.

Savage rally

In just a month, US markets have drastically sharpened speculation of 2024 rate cuts, implying a full percentage point of easing by this time next year, with a 64 per cent chance of the first drop as early as March.

In Australia, futures imply a 60 per cent of an RBA rate cut by November next year, from 32 per cent before the RBA meeting.

Even so, fund managers pointed out that the RBA had started its tightening cycle later and slower than its peers and talk of rate cuts were premature.

“Australia remains one of the few jurisdictions where the central bank cash rate remains below the level of inflation,” said Dan Siluk, a portfolio manager at Kapstream Capital. “This suggests monetary policy may not be restrictive enough.”

He cautioned that should inflation fail to slow in line, or at a more rapid pace, than the RBA’s forecasts, “rate hikes need to remain on the table”.

The view is shared by Greg Stock, a senior portfolio manager at Perpetual.

“Markets have recently focused on the US and large global economies and their accelerated position in the cycle, and tried to extrapolate implications for Australia,” he said. “We have to be patient. Unfortunately for those wishing for rate cuts, I can’t see that happening in 2024.”

Ophir’s Mr McMillan said the diverging rate outlook between the US Federal Reserve and the RBA would underpin the Australian dollar.

“2024 might be a better year for a US holiday for Aussies,” he added. The local dollar has shed 3.4 per cent this year.