But it came as no surprise to anyone, or at least to major bank economists and to 95% of ASX traders who believe recent datasets were not enough to push the Board off its tightening bias.
Pausing the rate for the second time since hiking it at its current peak in November 2023, the RBA said today’s decision ensures the central bank has enough breathing room while the outlook “remains highly uncertain” and inflation continues to weigh on Australians’ real incomes.
“The Board needs to be confident that inflation is moving sustainably towards the target range,” the RBA said in its 19 March monetary policy decision announcement.
“To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.”
The 2023 final quarter CPI showed inflation had slowed faster than the RBA expected, while the latest monthly read revealed the annual rate has hit 3.4%, also below forecast.
“While recent data indicate that inflation is easing, it remains high,” the Board said, adding that it expects “it will be some time yet before inflation is sustainably in the target range”.
Even experts admitted the latest inflation figures offered more noise than signal given seasonal factors like increased travel spending in January.
The central bank expects inflation to track towards its target band of 2-3% by 2025, and reach the midpoint in 2026.
RBA governor Michele Bullock earlier ruled out any imminent rate cuts until inflation in Australia returns to target, while ruling in further rate increases should inflationary pressures arise.
Today’s announcement echoes the previous meeting’s statement, with the Board maintaining that the interest rate can move in either direction to ensure inflation returns to target in a reasonable timeframe.
Unemployment and productivity
Shifting seasonal factors also affect another crucial dataset that predicates RBA’s decision: unemployment.
Recent ABS data revealed unemployment rate hit a two-year high, jumping 4.1% in January.
Slowing inflation and rising unemployment show that interest rate hikes are working as intended, so much so that economists agreed cuts were necessary to slow down the rise in unemployment.
However, the ABS said the above-4% unemployment rate may be driven by people who were “not attached to a job” but would, in fact, return to work after the summer holiday period.
This led to economists tagging these figures as weak.
“While the January labour force survey came in weak, we think the RBA, like us, is expecting a payback in the February data,” ANZ head of Australian economics Adam Boyton said.
Rapid wage increase amid low labour outputs, which is inflationary, is likewise making the RBA wary about cutting rates.
The latest wage price index (WPI) revealed salary growth in Australia outpaced inflation last year.
Conversely, productivity, measured by GDP per hour worked was down 0.4% in the same period, pushing real unit labour costs to rise by 3.7%.
“[Growth in unit labour costs] 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 Board noted.
NAB head of market economics Tapas Strickland was quick to note the mention of a pickup in productivity growth “suggests the RBA remains comfortable with its forecasts for productivity growth to pick up, which underpins a return of inflation to the mid-point by 2026.”
When will the RBA begin cutting interest rates?
All major four banks are fully priced for the RBA to begin dropping the cash rate by the third quarter of 2024 – in September for CommBank and Westpac, and November for ANZ and NAB.
Recent data flow falling in line with RBA’s forecast further reinforces this forecast.
But the question of when the shift will actually begin lies in more robust data coming in.
“The RBA hasn’t learned anything that pushes them to reassess their February outlook,” NAB senior economist Taylor Nugent said.
According to experts, the Reserve Bank will have to wait until February labour force data, coming out on Thursday, and the first quarter consumer price index on 24 April to obtain a more accurate gauge.
“We expect signs of a moderation in inflation will see the RBA shift to a neutral policy stance by the May meeting,” ANZ economists said.
The 2024 Q1 CPI will include greater coverage of price movement in services.
The RBA reiterated in its statement today that services price inflation has remained elevated as prices in several categories continue to increase, justifying its decision.
Governor Bullock will face the press at 3:30 pm (Sydney time) to further discuss today’s decision.
“It will be hard for her to keep her hawkish bias with economic growth disappointing, inflation falling and unemployment on a clear upward trend,” said eToro market analyst Josh Gilbert.
“Today’s statement was somewhat arguably less hawkish, but the bank has continued to adopt the strategy that they are unwilling to declare the job is done on fighting inflation, reiterating that a hike ‘can’t be ruled out’."
RBA’s move to boost the housing market
While we may have to wait a few more months for the cash rate to drop, experts believe today’s RBA decision will provide a boost in consumer confidence and, in turn, further lift the housing market.
“Historically we have seen a close relationship between consumer sentiment and the volume of home sales,” CoreLogic research director Tim Lawless said.
“Following the 6.2% rise in the February consumer sentiment reading from Westpac and the Melbourne Institute, a further lift in confidence could be accompanied by a rise in home purchasing,” Mr Lawless added.
This, he said, could add to housing demand that has remained “quite resilient despite the higher interest rate environment and cost of living pressures”.
PropTrack senior economist Eleanor Creagh agreed, citing the record-high increase in national home prices in February.
Experts expect more positive activity in the near term, with many anticipating rates will fall in the second half of the year.
“Despite a weaker outlook for the economy, the positive tailwinds for housing demand and a slowdown in the completion of new homes are likely to offset the impact of reduced affordability and a slowing economy,” Ms Creagh said.
“As a result, prices are expected to lift further in the months ahead, particularly while the expectation remains that interest rates will move lower in late 2024.”
Photos from the Reserve Bank of Australia
Need help with a home loan?