Economists have waved off the RBA’s warnings about inflation and are sticking to their forecasts of rate cuts by the end of the year.
While the central bank began a new era by insisting it is not ruling out either rate rises or cuts in 2024, financial markets are pricing in a 40 per cent chance that easing will begin as early as June.
Most economists are tipping cuts of up to 75 basis points by the end of the year, most likely beginning in the September quarter.
Leaving the cash rate unchanged on Tuesday at 4.35 per cent, the RBA made it clear it wants more comfort that inflation is heading back to the bank’s target range of between 2 per cent and 3 per cent before considering a rate cut.
“The risks are now more balanced, but the RBA appears to feel that with the economy still growing it can afford to wait for more evidence before cutting, given the desire to avoid the risk of cutting too early and then having to reverse course if inflation does not prove to be under control,” AMP chief economist Shane Oliver said.
“Of course, it arguably made a mistake in the opposite direction two years ago in waiting too long to raise rates.
“Our assessment remains that the combination of weaker growth and a faster fall in inflation than the RBA currently expects will ultimately force its hand, and we continue to see it cutting rates from mid-year,” said Dr Oliver, who is tipping three cuts of 25 basis points each by the end of the year.
Tuesday’s decision by the RBA board was accompanied for the first time by its quarterly statement on monetary policy detailing revised forecasts for economic growth, inflation and unemployment as part of increased transparency around the bank’s decision-making.
Notably, the 2023-24 growth forecast for the economy was wound back to just 1.3 per cent from 1.8 per cent, with growth for calendar 2024 now seen at 1.8 per cent, down from 2 per cent previously.
The inflation forecast for the year to June has been revised down to 3.3 per cent from 3.9 per cent, with the forecast for 2024 reduced to 3.2 per cent from 3.5 per cent.
The RBA said it was “highly attentive” to the risks posed by inflation, which is not expected to “sustainably” retreat back under 3 per cent until the end of 2025..
“While recent data indicate that inflation is easing, it remains high,” it said.
“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out.”
The RBA also cited “a high level of uncertainty” around the outlook for the Chinese economy, which has a major bearing on Australia, and the implications of the conflicts in Ukraine and the Middle East.
“Domestically, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand, and while the labour market remains tight,” it said.
“The outlook for household consumption also remains uncertain.”
Inflation slowed quicker than expected to 4.1 per cent in the December quarter. But while prices for goods are coming down, RBA governor Michele Bullock told an historic, post-decision media conference that the high cost of services remained a concern.
However, she continually refused to repeat the mistake of her predecessor Philip Lowe in tipping the timing of any rate movements.
“We judge the risks as fairly balanced,” she said. “We haven’t ruled anything out, we haven’t ruled anything in. My predecessor used to talk about the narrow path. I think we are on that narrow path, but we need to be aware of the risks on both sides.”
She also expressed optimism that the much-maligned productivity rate would improve, describing the focus on quarterly numbers as “unhelpful”.
“We need to take a step back. We have assumptions in our forecasts that productivity will return to some sort of long-run trend, which will be positive because that’s really important for the economy.”
The post-decision media conference and the simultaneous release of the monetary policy statement were firsts for the bank under a new communication regime aimed at helping Australians better understand how it decides on rates.
It has so far received a mixed reception. While the immediate commentary was welcomed, Deloitte Access Economics expressed concern that the more frequent speaking appearances by Ms Bullock and board members risked adding “to the noise surrounding interest rate decisions and make interpreting the RBA’s intent more difficult”.