It seems we may have a reason to get into the festive spirit, with commentators predicting the RBA will take the foot off the rates pedal from here. There’s even talk of a cut to the official cash rate by year-end 2024.
The RBA has released its December decision, and analysts say it’s striking an unexpectedly dovish tone.
Sufficient room for surprises
In a report, the Barclays (LON:BARC) research team said: “We think that the bank's November forecasts bake in enough space for data surprises. This, coupled with the bank's data dependence, suggests low likelihood for further hikes. We expect the next move to be a cut in Q4 24."
This week the central bank did what was widely expected and kept the cash rate unchanged at 4.35% and the interest rate on Exchange Settlement Balances at 4.25%. There was a rise in November, following four months of reprieve, and a long cycle of hikes preceding that under the tenure of Philip Lowe.
Barclays considered the bank’s statement on its decision to be less hawkish than November’s and also less hawkish than expected.
“The bank's ‘month-by-month’ policy of looking at the data meant little likelihood of a hike today, given the bank had not received any major data since November's hike that could have changed its outlook. However, given its more hawkish forecasts in November, the expectation was that the tone of the statement today would also tilt hawkish,” the report said.
eToro market analyst Josh Gilbert concurred with this assessment: “Michele Bullock has opted for a hawkish stance since taking the helm in September and reaffirmed that rhetoric in recent weeks, but today’s statement doesn’t necessarily reflect that stance.
“I expected to see a slightly tougher tone than we got, but it was somewhat dovish, pointing towards progress on inflation and a peak in weak growth.”
Barclays noted that the November hawkishness has built in some room for data shocks from inflation and growth, with projections that offer a sufficient barrier.
In its decision, the bank pointed to moderating goods inflation and easing labour market conditions and attributed the higher wages print to the Fair Work Commission's higher award wages.
“With respect to the updated forecasts, we think major surprises are now unlikely, especially on the inflation front, where the bank already expects a more gradual slowdown now.
“We continue to think the hiking cycle is over, though we do note that the bank's data-dependent approach means the possibility of a hike after the Q4 inflation print (January 31) remains if inflation is even higher than the bank's already raised outlook,” the report concluded.
Sting in the tail
Gilbert cautioned against an excess of optimism though.
“For now, the market may view last month’s hike as insurance as today’s pause and statement signal good news for the end of this cycle. However, the board has continued to reiterate their data dependency.
“That means if incoming data, particularly inflation, comes in hotter than expected, the RBA will have a big decision to make in February. The RBA will also have its eyes focused on Q4 inflation data at the end of January, which is their preferred measure, given the monthly CPI indicator doesn’t provide all the answers.
“Global central banks have hiked interest rates above 5% and are seeing inflation move in the right direction, and that will no doubt be on Michele Bullock’s mind."