Inflation ‘still too high’ as RBA keeps status quo on rates

There can be no doubt that interest rates in Australia are at a ‘plateau’ rather than a ‘peak’ – as is the case in the US and several other developed economies.

RBA Governor Michele Bullock at the RBA offices in Martin Place. Picture: John Feder

If Reserve Bank governor Michele Bullock has a slightly different take on the economy and monetary policy to her predecessor there was no sign of it in her first post-meeting statement.

The cash rate was left unchanged with a “hawkish outlook” as widely expected by economists.

Perhaps she aimed to show continuity with Philip Lowe’s policy preferences and minimise any public perception that policy decisions had previously been driven by the governor rather than the board.

But in any case the economic outlook didn’t change significantly in the past month.

“This suggests Governor Bullock may be wanting to minimise perceptions of change, at least initially,” said J.P. Morgan Australia chief economist, Ben Jarman.

He noted that there has been speculation about what coming changes to the board structure, required by the external Review of the RBA, may mean for board decisions over time.

“Lowe had pushed back on the idea that this will shift the balance of power in any significant way, and today’s (Tuesday) barely changed statement similarly suggests the leadership’s desire to project the image that decisions have always been the product of the board as a collective, rather than just the Governor alone,” Mr Jarman said.

It came as Australia’s 10-year bond yield hit a 12-year high of 4.61 per cent as the equivalent US Treasury bond yield hit a 16-year high of 4.7 per cent after resilient US economic data and hawkish comments from Bank of England and Fed officials.

The Aussie dollar hit an 11-month low of US63.11c and the S&P/ASX 200 share index fell 1.3 per cent to 6943.4 points, its lowest daily close in the past six months, and near an 11-month low.

In a slightly longer statement, Ms Bullock repeated almost verbatim Dr Lowe’s assessment of the outlook for inflation, the labour market, household consumption and the economy.

The crucial final paragraph of guidance on the outlook for monetary policy was unchanged.

The new RBA governor maintained that inflation is “past its peak but still too high” and set to remain so “for some time yet” as the prices of many services are “continuing to rise briskly”.

Fuel prices have “risen noticeably of late” and rent inflation “remains elevated”.

Recent data are “consistent” with inflation returning to target by late 2025.

But like Dr Lowe, Ms Bullock saw “significant uncertainties” on services inflation, monetary policy lags and how prices and wages respond to slower economic growth in a “tight” jobs market.

Moreover, the RBA’s guidance shows there can be no doubt that interest rates are at a “plateau” rather than a “peak” – as is the case in the US and several other developed economies, even if the peak might not be far off.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks,” Ms Bullock said.

“In making its decisions, the board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.”

The RBA’s repeated interest rate guidance is consistent with the interest rate futures market, which has fully priced in another 25 basis points rate hike to a fresh 12-year high of 4.35 per cent by April.

A number of leading forecasters including J.P. Morgan expect the RBA to hike again in November.

“We still expect a final 25 basis points hike at the next meeting,” Mr Jarman said.

He said the economy “seems to need a slight further nudge to ensure slowing in consumption continues to feed through to resource use, income, and so inflation.”

“In the latter end of a hiking cycle, decisions are necessarily more balanced, and we see the trigger for another hike as being upward revisions to GDP forecasts at the next Statement on Monetary Policy, which risk the return to the inflation target becoming even more protracted, even if the inflation forecasts don’t shift materially.”

He said housing market dynamics “may be a factor too at the margin” after another rise.

But although CBA and Goldman Sachs pushed out their expectations on the timing of rate cuts last week, many economists continue to expect a faster pivot to rate cuts than the market now expects.

Capital Economics thinks the bank will hike the cash rate to 4.35 per cent in November at its next meeting in November, then pivot towards rate cuts earlier than most anticipate.

“The bank didn’t seem to be too concerned about the rebound in headline inflation and the stagnation in trimmed mean inflation in August,” said the forecaster’s head of Asia Pacific, Marcel Thieliant.

“Most of the increase in the RBA’s cash rate has now been passed on to households in the form of higher mortgage rates. However, the risks are clearly tilted towards continued resilience.”

Business surveys and Westpac’s Leading Index suggest that economic activity is holding up well.

The key question is to what extent the bank is willing to tolerate upside surprises before it decides that further tightening is required.

Previous Governor Philip Lowe argued that the bank wouldn’t be able to tolerate inflation returning to target any slower than the bank was anticipating.

“If we are right and the quarterly CPI on October 25 shows that underlying inflation isn’t moderating as quickly as the bank had anticipated, we expect Ms Bullock to deliver a final 25bps hike next month to boost her inflation-fighting credentials,” he said.

“However, we are among the most pessimistic forecasters for the outlook for GDP growth.”

He thinks the bank will cut as soon as the June quarter, one quarter earlier than most anticipate.

By contrast, the market only sees about a 50 per cent chance of a rate cut next year.