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The decision to hold the cash rate at 4.35 per cent came as no shock to the forecasting community, however, economists were quick to point out the Reserve Bank of Australia’s (RBA) clear dovish shift in the accompanying Statement on Monetary Policy (SMP) and governor Michele Bullock’s press conference following the announcement.
In particular, the RBA’s repeated use of “not ruling anything in or out” was taken out of the December SMP and acknowledged that the board is “gaining some confidence that inflation is moving sustainably towards target”.
Further, economists noted that the SMP and Bullock’s press conference made acknowledgements to economic data being “on balance softer than expected in November”, referring to more easing in wage pressures than expected and soft gross domestic product growth.
Commonwealth Bank of Australia’s (CBA) head of Australian economics, Gareth Aird, called the language an “unambiguous shift in the dovish direction”.
Aird said they are encouraged by the statements from the board for a February rate cut, but “we are not across the line yet”.
Luci Ellis, chief economist at Westpac, said the change in the RBA’s language was a “welcome acknowledgement that disinflation remains on track and that we are getting closer to the point that some of the current policy restrictiveness can be withdrawn”.
“And in the media conference, the governor conceded that there were scenarios in which the board ended up cutting in February, while prudently choosing not to describe one.
"In acknowledging that reality, the RBA has clearly tilted the probabilities back towards an earlier start date for the rate-cutting phase than where it stood a few weeks ago. It does not, however, shift that balance of probabilities enough to change our base case to be earlier than May just yet,” Ellis said.
Judo Bank’ chief economic adviser, Warren Hogan, commented that the extent to which the RBA shifted its language in the policy statement came as a surprise.
“The financial market reaction and many commentators will interpret this as shift towards a rate cut in the new year, possibly as early as February. We are not sure this was the RBA’s intent, even though the board would have assumed this would be the response.
“The new language undoubtedly reveals the RBA’s increased comfort that the monetary policy strategy remains on track. Australia remains on the narrow path,” Hogan said.
Hogan stated that while the recognition of softer economic data is “good news”, it does not hold any implications or explicit signalling for what may occur going forward.
“The RBA cash rate is going nowhere fast. Much will depend on how Australian consumers respond to easing financial pressures over the summer. The financial markets are ahead of themselves, but there is nothing new in that.”
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