Investing.com - Analysts at UBS have recently provided an insightful interpretation of the Reserve Bank of Australia's (RBA) May meeting minutes. Even though the minutes appeared to lean towards a hawkish stance, the analysts believe the overall sentiment was dovish.
Following the meeting, RBA Governor Bullock acknowledged the possibility of a rate hike, a sentiment echoed in the minutes. The minutes also hinted at a higher cash rate being necessary, even amidst ongoing weakness in aggregate demand. Despite these hawkish tones, the Board discussed only two options: hiking rates or maintaining them, with no consideration of easing.
However, UBS analysts point out that the RBA refrained from raising rates, suggesting a high threshold for rate hikes in the future. They also noted a shift in the RBA's stance, with the Board now seemingly willing to tolerate inflation above their target for a significantly longer period than previously indicated.
The minutes revealed that the RBA Board has limited tolerance for inflation returning to target later than 2026, a departure from their November 2023 stance. At that time, the Board expressed concerns about inflation expectations increasing if the cash rate remained unchanged, given their low tolerance for inflation returning to target after 2025.
Despite these hawkish comments, the RBA decided that maintaining the cash rate was the stronger option at the time. The Board also expressed a willingness to overlook short-term variations in inflation to avoid excessive fine-tuning of interest rate changes.
UBS analysts maintain their expectation for the RBA to keep the cash rate 'higher for longer' at 4.35%. They do not foresee the RBA cutting rates until February 2025, with a relatively modest easing cycle of -25bps per quarter by the end of 2025, to 3.35%. They also highlight the possibility of a near-term 25bps hike, mainly contingent on the upcoming minimum/award wage decision and the risk of another upside surprise for CPI in Q2-24.
However, the analysts note that recent government budgets have announced increased subsidies that could technically lower headline CPI over the year to Q2-25 by over 0.75%. This could lead to a significant downward revision in the RBA’s CPI forecasts in their August 2024 Statement on Monetary Policy (SOMP).
Although the RBA's SOMP from May 2024 adjusted their headline CPI prediction for both Q2-24 and Q4-24, projecting a rebound to 3.8% year on year, they maintained their CPI projection of approximately 3% year on year by Q4-25. The recent addition of subsidies into the RBA's forecasting model is expected to bring down their predictions, possibly to around 3.25% year on year over the forthcoming year.