The Reserve Bank of Australia (RBA) signaled a potential shift towards an interest rate cut, ending a year-long pause, following its December policy meeting. While the cash rate remained at 4.35%, the RBA’s statement softened its previous hawkish tone, omitting phrases suggesting a restrictive policy stance and opening the door for potential easing.
The RBA acknowledged recent inflation and economic data align with November forecasts, expressing growing confidence in inflation’s sustainable trajectory toward the target range. This shift in language, coupled with weaker-than-expected Q3 economic growth and subdued wage increases, fueled speculation of a rate cut as early as February.
Following the announcement, the Australian dollar dipped 0.9% to $0.6380, and three-year bond futures rallied, reflecting increased market expectations for a rate reduction. Current market pricing suggests a 57% probability of a February cut, with a first easing fully priced in by April 2024.
RBA Governor Michele Bullock emphasized the data-dependent nature of future decisions, highlighting upcoming quarterly inflation figures, labor market indicators, and consumption data as crucial factors influencing the February meeting. Bullock confirmed the board did not consider a rate cut in December but deliberately adjusted the statement language to reflect softer economic data.
While headline inflation retreated to 2.8% in Q3, falling within the target band, this was largely attributed to temporary government electricity bill rebates. Core inflation remained persistent at 3.5%, underscoring the RBA’s ongoing concerns.
Globally, many central banks, including the U.S. Federal Reserve, have already initiated rate cuts from elevated levels. The RBA has maintained its 4.35% rate, significantly higher than the 0.1% pandemic-era low, asserting its necessity to curb inflation within the 2-3% target range.
The National Australia Bank, previously forecasting a May cut, now acknowledges the possibility of a February move if data weakens further. Citi Australia maintains a higher threshold for a February cut, while the Commonwealth Bank of Australia echoes the February cut prediction, viewing the RBA’s statement as encouraging.
Reinforcing the RBA’s concerns, a recent National Australia Bank survey revealed business conditions slumped to their lowest point since late 2020 in November, indicating weaker-than-anticipated economic momentum. Furthermore, anticipated consumer spending rebounds remain elusive, with consumers prioritizing debt reduction and retaining government tax cut benefits.
Market analysts welcomed the RBA’s shift in tone, viewing the removal of the non-committal “not ruling anything in or out” phrase as a significant and overdue acknowledgment of evolving economic conditions. The statement reinforces the central bank’s data-driven approach, setting the stage for a potentially pivotal February meeting where economic data will ultimately determine the timing of Australia’s next interest rate move.
