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Cash rate pause continues under newly-styled RBA

Cash rate pause continues under newly-styled RBA

In a promising start to 2024, the newly-styled Reserve Bank of Australia (RBA) left the cash rate unchanged at 4.35% today after its first meeting for 2024.

Yet neither rate cuts nor further rate rises can be ruled out, with the country's economic outlook still highly uncertain, according to RBA governor Michele Bullock.

Today's decision was an unsurprising one for the Big 4 Banks, who all predicted such an outcome, despite easing inflation figures announced on January 31.

Australian Bureau of Statistics' data shows the Consumer Price Index (CPI) dropped to 4.1% in the 12 months to the December 2023 quarter - the lowest in two years and down from 5.4% in the September quarter.

The monthly December CPI indicator also dropped to 3.4%, down from 4.3% in November.

"Encouraging signs but uncertain outlook"

While the latest CPI figures were more positive than many expected, they didn't convince the RBA to do more than pause cash rates.

The central bank remains determined to reach its long-held target rate of 2%-3% which it forecasts will occur in 2025, with a midpoint reached in 2026.

"While there are encouraging signs, the economic outlook is uncertain and the Board remains highly attentive to inflation risks," Ms Bullock said.

She added that goods price inflation is lower than the RBA’s November forecasts and continues to ease; however, services price inflation is declining more gradually.

Wages growth has picked up but it is not expected to increase much further; employment is only expected to grow moderately; and the unemployment rate of 3.9% in December 2023 - and the broader underutilisation rate - are only expected to increase "a bit" further.

The remainder of Ms Bullocks' speech followed the cautious similarity of her's and former governor Dr Phil Lowe's monthly announcement, including a resolution to "doing what is necessary to achieve the central bank's highest priority - returning inflation to target".

"Monetary policy needs to remain restrictive"

The RBA is not the only major economic organisation to follow a cautious route on inflation.

In its Interim Economic Outlook for February 2024, the Paris-based Organisation for Economic Co-operation and Development (OECD) argued that with inflation still too high in most global economies, monetary policy needs to remain prudent.

"Monetary policy needs to maintain a restrictive stand to ensure inflation durably aligns with central banks’ targets," the report stated.

"With near-term inflation expectations moderating further and excess resource pressures fading in labour and product markets, this is likely to limit scope for any policy rate reductions until well into 2024 in most advanced economies."

The OECD report also warned additional rate rises could still be needed in countries where underlying inflation pressures are particularly persistent.

"We want inflation back in the background"

Today's continued pause, which follows that of December 2023, was backed by a new start for the RBA, with the central bank now holding its cash rate meetings over two days, rather than one.

The bank will also hold only seven further cash rate meetings in 2024 - rather than 11 in total - and only some of these meetings will be held on the traditional first Tuesday of the month.

Adding to the RBA's new style are its press conferences, which are held an hour after its announcements.

At today's first such event, Ms Bullock said in the past two decades, inflation had only lived in the background of Australian lives.

"Now, everyone is focussing on inflation but we want inflation back in the background," she said.

Ms Bullock added that while she welcomed the recent declines in inflation, it would be a risk to have it drift; thus, the central bank's job was not over yet.

"The current rate of inflation still has a 4 in front of it," she said.

"We're trying very hard to bring it into balance again but we're also very alert to risks on both sides."

Ms Bullock said that in this way, "nothing's in and nothing's out" when it came to both further cash rate cuts or increases.

She also warned that the RBA's cash rate forecasts for the future were "assumptions" and the bank would need to be convinced that inflation was going to hold sustainably before taking any major risks.

"We are driven by data and our risks need to be fairly balanced," Ms Bullock said.

"The alternative to these cash rate rises is much worse.

"Grocery prices have already risen 20% in the past two years."

Ms Bullock said the central bank's new and longer style of making its cash rate decision over two days was working well already.

"The two days allow for more time and discussion and the six-week break (between meetings) allows us time to think more broadly," she said.

The RBA’s next monthly cash rate announcement will be on Tuesday, March 19 at 2.30pm AEDT. Eight meetings - rather than 11 meetings - will now be held every year in February, March, May, June, August, September, November and December.

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