The RBA is set to keep its official cash target rate unchanged at 4.35%, having little reason to raise the rate after a series of softer inflation readings.
Data released last week showed Australian consumer price index inflation grew less than expected in the fourth quarter, with its pace of growth slowing sharply from the prior quarter. A monthly CPI indicator for December also showed inflation coming closer to the RBA’s 2% to 3% annual target range.
Falling Australian inflation comes as the effects of the RBA’s 2022 and 2023 rate hikes are baked into the economy. Decreasing inflation is the key driver of expectations for any interest rate cuts from the RBA in 2024.
The RBA had hiked rates by a cumulative 425 basis points over the last two years, as it moved to contain a post-COVID surge in inflation.
But the central bank has so far given scant indication on when it plans to begin trimming rates. Governor Bullock has also warned markets over potentially sticky inflation, citing upside risks from services inflation and a strong labor market.
While inflation has cooled substantially in recent months, it still remains well above the RBA’s annual target range- giving the bank little impetus to begin trimming rates in the near-term.
The Australian labor market has also remained largely robust in recent months. While a slowing pace of growth in hours worked indicated some cooling, unemployment remained low, while Australia’s participation rate remained close to record highs.
A cooling labor market is also one of the key considerations for the RBA to begin cutting interest rates.
“…the case to raise rate(s) from here is steadily losing traction. We expect that over coming months, further declines in inflation and soft outcomes in the real economy will give the Board enough confidence that inflation will return to target on the desired timetable. They will therefore have scope to reduce some of the current restrictiveness of policy,” Luci Ellis, Chief Economist at Westpac Group said in a recent note.
Ellis added that they expected the RBA to begin trimming rates only by September.
Despite recent declines in inflation, the RBA has stuck to its forecast that inflation will only reach its target range by 2025. Such a scenario could spur the bank into keeping rates higher for longer.
But on the other hand, Australian economic growth and business activity has cooled sharply in recent months. Further cooling could invite earlier rate cuts by the RBA, especially on the risk of a potential recession in the country.
Tuesday’s rate decision is also the RBA’s first meeting after the implementation of sweeping changes in its regulatory structure and meeting frequencies. The central bank will now meet eight times in a year, down from 11, and its meetings will also take place over the span of two days.
The Australian dollar fell 0.1% on Monday in anticipation of the decision, while the ASX 200 index shed nearly 1%.
Source: Economy - investing.com
