RBA no closer to cutting rates but it’s not considering raising them

As other nations slash their interest rates and politicians demand cuts in Australia the RBA board has for the first time since March not considered the case for a rise.

Reserve Bank governor Michele Bullock conducts a press conference on Tuesday to discuss the bank’s monetary policy decision. Picture: John Appleyard

The Reserve Bank delivered another “hawkish hold” on interest rates as expected.

But with other nations now slashing rates and politicians screaming out for rate cuts in Australia the board didn’t consider the case for rate rises for the first time since March.

In her post-meeting press conference, RBA governor Michele Bullock framed it as a change in “format”.

“The format of the meeting was slightly different,” she said.

“The way we framed the discussion really was around what had changed since August, and what would we need to see to get either a raise in interest rates or lowering interest rates.

“So there wasn’t an explicit alternative in the sense that I’ve kept that in the past.”

But in light of recent events it is hard not to conclude to some extent that the optics of the RBA continuing to say that it is considering the case for further rate rises at this point were too great.

Higher interest rates were “smashing household budgets and slowing our economy,” federal Treasurer Jim Chalmers said early this month.

Last week the US Federal Reserve began its policy easing with a jumbo-sized 50 basis points rate cut – joining a wave of interest rate cuts by Western central banks in recent months.

This week, Australia’s Greens party threatened to withhold its support for RBA reforms legislation unless Mr Chalmers used his power to force the RBA to cut interest rates. That was never going to happen.

However, it is interesting that the RBA has stopped warning of further rate increases.

The RBA will shun the notion that it feels any kind of pressure to adjust its rhetoric in response to what politicians are saying, even if the domestic economy is struggling and other central banks have just embarked on a major rate cutting cycle, albeit from higher interest rate levels.

But Australian financial markets reacted sharply to this revelation, if only for the fact that economists were unanimously saying that the RBA would again consider the case for a rate rise.

The Australian dollar initially rose about 20 points to a fresh nine-month high of US69.69c after the post-meeting decision statement from the RBA board seemed hawkish enough.

But it fell back to an intraday low of US68.14c in the hour after the revelation from Ms Bullock.

Australia’s 3-year bond yield fell 9 basis points to 3.45 per cent after initially rising to 3.55 per cent and the 10-year bond yield fell 6 basis points to 3.90 per cent.

The reaction also showed in market pricing on the timing of interest rate cuts.

The market-implied likelihood of a 25 basis point cut by December rose from 64 to 80 per cent.

The market was 84 per cent priced for 50 basis points of rate cuts by February.

Ms Bullock was a bit less forthcoming on ruling out rate cuts in the near term.

In last month’s press conference, that hawkish guidance was in her opening statement.

“So based on what I know today and what the board knows today, what we can say is that a near-term reduction in the cash rate doesn’t align with the board’s current thinking,” she said in August.

This time it had to be dragged out of her later in the press conference.

“Yes, didn’t I mention it, although I’ll mention it now,” she said in response to a question.

“Yes, the board did discuss whether or not the messaging should change … we didn’t explicitly consider an interest rate rise, because the framing of the discussion was what has changed since last time, and the assessment was ‘not enough’, and it was mixed enough for us not to change our view from last time.

“Having said that, the message clearly from the board is that in the near term, it does not see interest rate cuts.”

Capital Economics stuck to its view that the first rate cut won’t come until the June quarter of 2025 but said the risks are “starting to tilt towards an earlier rate cut”.

Ms Bullock noted in the post-meeting press conference that recent economic data had not “materially altered the outlook for the economy”.

She reiterated that progress in returning inflation to target had slowed over the past year and will have remained slow in the third quarter.

Accordingly, the bank still saw a “need to remain vigilant to upside risks to inflation”.

Ms Bullock downplayed the fact that most other advanced economy central banks were now easing policy, saying Australia’s monetary policy was less restrictive and overseas labour markets had loosened by more – and overseas inflation had come closer to central banks’ targets than in Australia.

“Nonetheless, the RBA is starting to tilt into a more dovish direction,” Capital Economics head of Asia-Pacific Marcel Thieliant said.

“For a start, the board didn’t discuss a rate hike at today’s meeting for the first time since its March meeting.

“What’s more, Bullock noted that the outlook was ‘slightly softer’ than foreseen at the bank’s August meeting, with ‘some risk’ that consumption growth could remain softer for longer.

“And the statement no longer mentioned, as in August, that ‘wage growth is still above the level that can be sustained given trend productivity growth’, instead arguing that ‘wage pressures have eased somewhat’.”

Mr Thielant saw little evidence that the rebound in real household incomes resulting from lower inflation, tax cuts and a stabilisation in household interest payments was resulting in a marked pick-up in consumption growth.

Even as jobs growth has continued to be strong, retail sales were much weaker than expected in July.

“Accordingly, GDP growth will probably not pick up from the subdued 0.2 per cent quarterly rate increases seen over the last three quarters to the average 0.65 per cent rate required to meet the RBA’s year-end forecast,” Mr Thieliant said.

“It’s no surprise then that the financial markets are pricing in more than even chance that the RBA will cut interest rates before the end of the year.”

Originally published as RBA no closer to cutting rates but it’s not considering raising them