We won’t be pushed into cutting rates early, is the message from RBA governor

Reading between the lines of the RBA’s statement, the message is this: “Interest rates have probably peaked but don’t get carried away with interest rate cuts.”

RBA governor Michele Bullock conducts a press conference – the first of what is planned to be a regular briefing. Picture: Dylan Coker

Reading between the lines of the Reserve Bank’s statements after its February meeting, the message is this: “Interest rates have probably peaked but don’t get carried away with interest rate cuts.”

Policymakers don’t want to see excessive risk-taking premised on imminent rate cuts, particularly while their ability to deliver them might be limited by stubbornly high inflation.

It’s a similar story in Europe and the US, where central banks are indicating that rate cuts are coming, but barring some calamity they won’t occur quite as soon as markets have been predicting.

The RBA’s new policy board even borrowed some words from last week’s FOMC statement, saying it “needs to be confident that inflation is moving sustainably towards the target range”.

The FOMC said it wanted to see “inflation is moving sustainably toward 2 per cent”.

However, the Fed is obviously closer to rate cuts, saying it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence” that inflation is falling “sustainably”.

At least optically, the RBA board still has a “tightening bias”.

Although the risk of tightening was further de-emphasised, relative to November, the final phrase made the statement sound surprisingly hawkish for a central bank which last week saw core inflation come in three-tenths below its forecasts for the December quarter.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable time frame will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out,” the RBA board said.

But perhaps that was more to discourage excessive risk-taking, particularly while inflation is high.

“We do not expect the RBA to act on its hiking bias,” said CBA head of Australian economics Gareth Aird. Indeed, the RBA now seems very unlikely to act on its tightening bias.

Financial markets appeared to downplay the apparently hawkish RBA statements.

Overnight index swaps pricing saw the projected timing of a first rate cut extend from August to September and the projected level of the cash rate at year end creep up 5 basis points to 3.86 per cent – still implying about two cuts of 25 basis points from the current level of 4.35 per cent.

‘We do not expect the RBA to act on its hiking bias’

Bond yields soon returned to pre-meeting levels after a brief move higher.

The Australian dollar rose as much as 0.5 per cent to US65.21c, helped by US dollar weakness.

The local share market fell 0.6 per cent but only because of a sharp rise in US bond yields.

Responding to a question on her current confidence level that inflation is in fact moving in a sustainable way back to the target range, RBA governor Michele Bullock said that, based on the RBA’s forecasts, her confidence level was only five out of 10.

“I’m confident I’d think that the signs are that, as my predecessor used to talk about, the narrow path – I feel that we are potentially on that narrow path,” she said.

The fact is the RBA’s revised forecasts now show core trimmed mean inflation falling back to the midpoint of the 2-3 per cent target in the forecast horizon, which was rolled out to mid-2026.

In the wake of the RBA inquiry it might be argued that the bank would be compelled to hike rates again if its forecasts didn’t show inflation returning to the midpoint of the band by the end of its forecast horizon.

Despite the lower than expected core inflation of 4.2 per cent for the December quarter, the RBA’s revised forecasts still show core inflation only just falling below the top of the 2-3 per cent band to a slightly lowered 2.8 per cent by the end of 2025.

As usual the forecasts are conditioned on a path for the cash rate broadly in line with expectations derived from surveys of professional economists and financial market pricing.

The cash rate is assumed to remain around its current level of 4.35 per cent until the middle of 2024 before declining to around 3.2 per cent by the middle of 2026.

With inflation forecast to hit the middle of the band by mid-2026, if productivity improves as expected and assuming mid-2026 is considered to be a “reasonable time frame”, perhaps the best guess for interest rates is 115 basis points of cuts from mid-2024 to mid-2026 assumed by the RBA.

But while inflation is coming down, CBA’s Mr Aird said the RBA would be in no hurry to declare victory.

“The RBA will likely wish to keep the tightening bias for a little longer for their communication strategy,” he said. The governor and deputy governor do not just communicate with market participants. They communicate with households, businesses and policymakers.

“Maintaining a tightening bias signals to the fiscal authorities that it’s too early to declare the inflation fight over. The RBA would not wish to see fiscal settings loosened until further progress on inflation has been made towards the target band.”

Still, he says it will take more than just weak growth for the RBA to cut rates. “The unemployment rate will likely need to rise a little more quickly than the RBA anticipates and inflation will need to fall a little faster,” he said. “We expect both of those outcomes to transpire and we remain comfortable with our base case.”

Originally published as We won’t be pushed into cutting rates early, is the message from RBA governor