Reserve Bank of Australia expected to extend the pause, but what’s next?

The RBA is set to extend the pause into the third meeting in a row when it meets on Tuesday. Markets, however, will be focused on fresh signals offered by the central bank on the timing and the scope of a policy pivot.

Economists are divided, with some forecasting an RBA interest rate cut not until November while some expect the Bank to begin lowering rates in September. Amidst the uncertainty around the timing of the rate cut, RBA Governor Michele Bullock’s outlook on inflation and the policy rate will hold the key, as she would take account of slowing economic growth and price pressures.

Data from the Australian Bureau of Statistics (ABS) showed the Consumer Price Index (CPI) rose 0.6% in the fourth quarter (Q4) of last year, under market forecasts for a 0.8% increase. A closely watched measure of core inflation, the trimmed mean, rose 0.8% in the same period, below expectations of a 0.9% increase.

The latest monthly inflation data for January showed that the CPI rose at an annual rate of 3.4%, at the same pace as seen in December while a tad lower than the estimate of 3.5%. Meanwhile, Australia’s annual growth slowed to 1.5% in Q4 from 2.1% the previous quarter, registering its lowest since early 2021.

But, the services inflation, measured by the Wage Price Index, increased 4.2% YoY in Q4, up from a revised 4.1% gain in the third quarter and above the market estimate of 4.1%. The reading was the highest since Q1 2009, with pay growth in both the public and private sectors. 

Even though wage inflation remains at elevated levels, Governor Bullock remains confident that it will come down. Testifying before the Australian Parliament last month, Bullock said that “inflation is being persistent, particularly in services. But it is coming down.”

Does this indicate a potential dovish shift in the central bank’s language in the upcoming meeting?

Previewing the RBA policy decision, analysts at TD Securities (TDS) explained, “it should be a fairly straightforward on-hold decision, though the focus will be if the RBA retains its soft hawkish bias. The jobs market has shown cracks after the dismal Dec-Jan prints while monthly CPI reaffirms the disinflation narrative, with the near-term inflation impulse towards the downside. We will keep an eye out on QT plans as the RBA has kept strangely quiet about it.”