RBA fuels hopes for rate cuts in 2024 despite further pause

In its first six-week meeting according to the new Board schedule, the Reserve Bank of Australia (RBA) has kept the official cash rate steady at 4.35 per cent – a decision very much aligned with market commentary.

The second monetary policy statement for 2024, since the central bank’s tightening cycle began, did not mention that future rate rises were being considered in order to bring inflation back to its target of two to three per cent.

“Recent information suggests that inflation continues to moderate, in line with the RBA’s latest forecasts. The headline monthly CPI indicator was steady at 3.4 per cent over the year to January, with momentum easing over recent months, driven by moderating goods inflation,” RBA Governor, Michele Bullock, said in a statement from the Board.

“Services inflation remains elevated, and is moderating at a more gradual pace. The data are consistent with continuing excess demand in the economy and strong domestic cost pressures, both for labour and non-labour inputs.

“Higher interest rates are working to establish a more sustainable balance between aggregate demand and supply in the economy. Accordingly, conditions in the labour market continue to ease gradually, although they remain tighter than is consistent with sustained full employment and inflation at target.

“Wages growth picked up a little further in the December quarter, but appears to have peaked with indications it will moderate over the year ahead. Nevertheless, this level of wages growth remains consistent with the inflation target only on the assumption that productivity growth increases to around its long-run average. Inflation is still weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment.”

The Board said that while inflation figures have been consistent with its medium-term expectations, it will not “rule anything out” to ensure this remains the case.

“While there are encouraging signs that inflation is moderating, the economic outlook remains uncertain. The December quarter national accounts data confirmed growth has slowed. Household consumption growth remains particularly weak amid high inflation and the rise in interest rates,” the statement said.

“After recent declines, real incomes have stabilised and are expected to grow from here, which is expected to support growth in consumption later in the year.

“Meanwhile, growth in unit labour costs remains very high. It has begun to moderate slightly as measured productivity growth has picked up in the past two quarters but whether this trend will be sustained is uncertain.”

The RBA maintained its forecasted target range for inflation was two to three per cent in 2025 and to the midpoint in 2026, as it expects employment to grow moderately, unemployment to rise a little, and services price inflation to fall slowly as growth in labour costs eases.

“The RBA kept the cash rate on hold as widely expected. The tone of the remarks was a tad dovish, albeit non-committal on an acknowledgement of peak rates. Inflation continues to moderate and a weaker labor market were both highlighted, but above-target inflation continues to sway the RBA’s hands for now,” Dwyfor Evans, Head of APAC Macro Strategy at State Street Global Markets, said.