Reserve Bank tipped to hold interest rates despite inflation fall
The Reserve Bank of Australia board is widely tipped to keep rates on hold at its meeting today but a dovish turn in its post-meeting statement could lay the foundations for a pre-Christmas cut.
The clear consensus of economists and the market is that the RBA board will keep the cash rate at 4.35 per cent at Tuesday’s meeting, given underlying inflation persists higher than they would like.
But price growth has steadily declined in recent months, with headline inflation back within the RBA’s two to three per cent target range, aided by government energy bill rebates.
AMP chief economist Shane Oliver still believes the central bank’s first cut will most likely come in February, though a December cut remains possible if monthly underlying inflation in October falls sharply and unemployment rises.
“While inflation fell again in the September quarter, the RBA will likely regard underlying inflation at 3.5 per cent year on year as still too high, with services inflation remaining sticky and will see still low unemployment as meaning that there is no urgency to cut,” he said.
“But the continuing progress in getting inflation down may see it become a little less hawkish in its commentary and it may make small downwards revisions to its inflation and growth forecasts for next year.”
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Oliver was one of 38 economists surveyed by Finder in the lead-up to the meeting who all predicted the cash rate to remain on hold in November.
Nomura Australia economists Andrew Ticehurst and David Seif also expect the Reserve Bank to stay put.
“RBA communication from its prior (23-24 September) meeting made clear that the board was looking for a ‘sustained’ decline in inflation – not one simply assisted by temporary government cost-of-living relief measures,” they said.
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“We think the board could remove its observation that inflation was ‘proving persistent’, and note that ‘welcome progress’ is being made in its battle to return inflation to target.”
The pair believe the post-meeting statement will likely tilt in a more dovish direction, although the board will likely not shed its view that the supply side of the economy remains somewhat constrained.
“Aside from the inflation comments, we think that comments around the supply side are the key things to watch, in terms of rate cut timing,” they said.
“Finally, with this meeting coming just hours before the US election, it would not be a surprise to see communication highlight global uncertainties and risks.”
JP Morgan analysts Ben Jarman, Tom Kennedy and Jack Stinson expected the statement to remain relatively unchanged, save for some tweaks to more explicitly state core inflation is still too high, even though headline inflation has returned to target.
While economists at all four big banks have tipped the RBA to start slashing rates in February, traders have not fully priced in a 25 basis point cut until June.
Treasurer Jim Chalmers said Australia was making “welcome, encouraging, hearting progress in the fight against inflation”.
“But we know that people are still doing it tough and the fight is not over yet,” he said.
– AAP
