Cash rate on hold and inflation forecast revised lower
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The decision to keep the cash rate on hold at 4.35% was almost universally expected, given the low inflation figures released for the December quarter, which came in roughly 45 basis points under the RBA’s forecast.
Other factors supporting a hold decision include weak retail trade outcomes, a gradual loosening in labour market conditions and an overall softening in economic activity.
Although the RBA doesn’t specifically target asset prices, the recent slowdown in the pace of housing value growth would also be seen as a positive outcome, de-risking the chances of a ‘wealth effect’ supporting household spending.
CoreLogic’s capital city Home Value Index slowed from a quarterly change of 3.9% in the middle of last year to 1.0% over the three months ending January.
While the data flows clearly support a hold decision, we aren’t likely to see the cash rate coming down any time soon.
The RBA hasn’t explicitly ruled out further rate hikes, in fact noting “a further increase in interest rates cannot be ruled out.”
The RBA is taking a cautious approach towards inflation outcomes and ensuring any policy stance on the cash rate trajectory is tempered and data-driven.
This position is supported by the OECD who, overnight, warned against cutting interest rates early:
“Monetary policy needs to remain prudent to ensure that underlying inflationary pressures are durably contained.
Scope exists to lower policy interest rates as inflation declines, but the policy stance should remain restrictive in most major economies for some time to come.”
Financial markets are more bullish, fully pricing in a rate cut by August and another by December this year at the end of yesterday’s trading.
With the RBA revising their inflation forecast lower via the Statement on Monetary Policy, which accompanied the board decision, there is a good chance we will see a rate cut late this year.
Lower rates, together with easing cost of living pressures and tax cuts will support a boost to borrowing capacity.
The combination of lower rates and lower inflation should also help to lift consumer sentiment, which has been languishing close to recessionary lows for around two years.
Logically, an increase in borrowing capacity and sentiment are likely to provide some stimulus to home purchasing activity.
Additionally, any adjustments to APRA’s 3.0% serviceability buffer, which is a potential outcome once the rate hiking cycle turns, could add further upside to housing markets.
An adjustment to the serviceability buffer isn’t guaranteed, but if there are changes to macroprudential settings, they could be accompanied by new policy mechanisms such as DTI, LTI and/or LVR limits aimed at containing housing credit risk.
Changes at the RBA
The new year brings a new schedule for the RBA, with the cadence of meetings winding back from 11 a year to eight, while the timeframe for each meeting has expanded from roughly half a day on the first Tuesday of each month to two half days.
We will also see the Reserve Bank Governor fronting a press conference an hour after the board meeting statement is released at 2:30 pm along with the quarterly Statement on Monetary Policy which would previously have been scheduled for a Friday release.
Adjusting the timing of board meetings from 11 to eight should provide the board with a more complete set of economic data to deliberate on and the expanded timeframe for each meeting means the board can tune into RBA staff updates in more detail.
A press conference after each meeting provides greater transparency to the board’s decision-making process and an opportunity to flesh out the communications rather than trying to fit everything into a one-page statement.
Around the middle of the year, we will see some further changes, with the RBA board splitting in two: one for monetary policy decisions and the other for the governance of the Bank.
We will also see anonymised voting results from board decisions and more contributions from an array of board members fronting the public.
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