Summary

  • The Reserve Bank of Australia (RBA) raised its cash rate by 50 basis points to 1.85% at its August meeting and signaled that further rate hikes will be needed to bring inflation back towards the goal over time.
  • Several elements of the monetary policy announcement remained essentially unchanged from previous meetings. However, there have also been significant language shifts that lead us to believe that the RBA will revert to smaller hikes going forward. Notably, the central bank indicated that while further policy normalization is expected in the coming months, it also noted that policy is “not on a predefined path.” The RBA also dropped references to ‘extraordinary monetary support’ that had appeared in previous announcements, suggesting it now sees itself a bit further down the path of monetary tightening and may not need to move forward any further. at an accelerated rate of 50 basis points. Given these changes, we believe the RBA will be more flexible going forward regarding the size and timing of future rate hikes.
  • With signals of further tightening but more flexibility, we now expect rate hikes of 25 basis points at the next RBA meetings in September, October, November, December and February, which would see the cash rate peak at 3.10% early next year.

RBA signals more rate hikes, but by how much and at what pace?

In a widely expected move, the Reserve Bank of Australia (RBA) continued on the path of monetary tightening at its August meeting, raising its cash rate by 50 basis points to 1.85%. The central bank has signaled that further rate hikes are needed to bring inflation back to target and rebalance supply and demand dynamics.

Looking more closely at the details of the monetary policy announcement, with a few exceptions, the RBA’s language was very similar to previous meetings. As in its previous announcements, the central bank drew attention to labor market tightness and signs of wage growth, as well as the resilience of consumer spending, while reiterating that the outlook for household spending remain a key uncertainty in an environment of high inflation. Speaking of inflation, the central bank pointed out that price pressures are still high in Australia, due to both global and local factors, and issued an updated inflation forecast in its monetary policy statement. The RBA has raised its central CPI forecast for CPI inflation and now expects it to reach around 7.75% in 2022, 4.25% in 2023 and 3% in 2024. Furthermore, given underlying price pressures, reduced average inflation is expected to peak at 6% this year and fall to 3%, the upper limit of the RBA’s target, by 2024. The bank central expects wage growth to pick up further and eventually become the main driver of inflation in a tight labor market. On the growth front, GDP forecasts show the economy growing respectably, averaging 4% this year before slowing to 2.25% in 2023 and 1.75% in 2024. growth suggest that the economy should be able to absorb further tightening. With much of the language unchanged from previous announcements, we believe the RBA is still on track to continue raising rates. The question is: by how much and at what rate?

To answer that question, we turn to the few notable language shifts that lead us to believe that the RBA will move forward with a lesser magnitude of rate hikes than its recent 50 basis point increases. While the RBA has again stated that it expects to take further steps to normalize monetary conditions over the coming months, and that the magnitude and timing of future interest rate hikes will be guided by incoming data, the latest announcement added that the policy is not on a “predefined course”. rates, indicating a meeting-by-meeting approach to monetary policy decisions based on incoming data.Other central banks around the world have also adopted this more flexible meeting-by-meeting approach, including the Federal Reserve and the European Central Bank. Overall, we expect the RBA to pay close attention to the second quarter wage data and July employment data released by its policy meeting. of September.

Additionally, the August announcement removed previous references to the “withdrawal of extraordinary monetary support.” Instead, that phrase was replaced with more standard language that “raising interest rates is another step in the normalization of monetary conditions in Australia.” This new language suggests that the RBA thinks it is now a bit further down the monetary tightening path and may no longer need to move forward at a 50 basis point accelerated pace – also a slightly accommodating tilt. Furthermore, in its statement on monetary policy, the RBA indicated that it seeks to reduce inflation in a way that keeps the economy in “balance”. We believe this language is also consistent with a more measured pace of rate hikes. Against this backdrop, we now expect the RBA to return to a steady pace of back-to-back 25 basis point rate hikes at its next meetings in September, October, November, December and February, which would lift the rate to cash at 3.10% in early 2023.

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