RBA warns it may raise rates again, but markets predict cuts
Markets doubt the Reserve Bank of Australia will deliver any more rate rises, despite the central bank warning on Tuesday it may need to deliver another cash rate increase if inflation remains too high.
While the RBA left the cash rate on hold at 4.35 per cent this month, the minutes of the central bank’s December 5 meeting reaffirm that another interest rate rise may be necessary to tame inflation.
“Members agreed that whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend on how the incoming data alter the economic outlook and the evolving assessment of risks,” the minutes said.
The statement runs counter to the prevailing sentiment among markets, which have pivoted towards predicting rate cuts from the RBA next year after the US Federal Reserve last week flagged an end to its tightening cycle.
Markets ascribe a one-in-four chance the RBA will cut the cash rate to 4.1 per cent at its second meeting of the year on March 19, 2024. Traders are almost fully priced for a rate cut by June 2024 and for two rate cuts by the end of the year.
Economists say the December quarter inflation figures, due on January 31, will be pivotal in determining whether the next cash rate move will be an increase or a cut.
Demand-driven inflation
The RBA said the case for a further rate rise stemmed from the fact inflation was increasingly demand-driven, and there was a risk it could remain above its 2 to 3 per cent target band beyond December 2025. The economy is still running at a pace viewed as inconsistent with low inflation, the minutes said.
But the central bank decided to keep the cash rate unchanged in December due to signs that high interest rates were working to cool the economy, while there was also a possibility unemployment could rise by more than anticipated.
“Members acknowledged that consumption growth had been quite weak, as many households are experiencing a painful squeeze on their finances, with inflation and higher interest rates weighing on real disposable incomes,” the minutes said.
The minutes described the decline in global inflation as “encouraging”, with the pick-up in the pace of disinflation cited as one of the reasons for leaving the cash rate unchanged.
Capital Economics analyst Abhijit Surya predicts a sharper-than-expected fall in inflation and slowing growth will force the RBA to start cutting rates as early as May 2024.
“It seems to be the case that the RBA is increasingly concerned about the health of the domestic economy,” Mr Surya said.
“It noted that household consumption was subdued in aggregate terms and falling outright in per capita terms. It also highlighted the fact that timely indicators pointed to a further weakening of consumer spending in the December quarter.”
ANZ head of Australian economics Adam Boyton said he also thought the RBA was done with rate rises. However, the first rate cut was unlikely until November 2024, he said.
The minutes also show the RBA board discussed whether it should start selling the bonds it purchased to support the economy during the pandemic.
However, it decided to stick with its current approach, which is to hold its bonds to maturity, rather than offload them in advance.
But the board will keep the prospect of selling its bonds on the cards due to the RBA’s exposure to interest rate risk and because of the “relatively gradual decline in the bank’s portfolio of bonds compared with some other advanced economy central banks”.
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