The RBA after the September monetary policy meeting suggested that the official cash rate would remain on hold for the foreseeable future, noting that the underlying inflation rate of 3.9% over the year to the June quarter “is still some way above the midpoint of the 2%–3% target range”.
The RBA has started to talk about scenarios, and this was reemphasised in the minutes of the meeting which was released Tuesday. As well as their current stance, the Minutes considered two scenarios that would justify financial conditions needing to be less restrictive than currently:
(i) if the economy proved to be significantly weaker than expected and this placed more downward pressure on underlying inflation than expected (due to higher household savings and/or if the labour market weakened more sharply than forecast); or
(ii) if inflation proved less persistent than assumed, even without weaker-than-expected activity.
So that begs the question, is the RBA about to pivot?
Well, CBA’s Gareth Aird who has been consistently forecasting rate cuts sooner for months now, than most of the other bank economists (I wonder why) suggests that We believe the introduction of these two scenarios that would justify less restrictive financial conditions provide an insight into the Board’s reaction function that could see the RBA commence an easing cycle this calendar year (in line with our base case).
Deputy Governor Andrew Hauser speaking at an event hosted by the Walkley Foundation said that despite the September minutes removing the line that “it was unlikely that the cash rate target would be reduced in the short term” the Bank had not change its tune arguing that its meeting minutes were not a particularly dovish message. The minutes also showed that board members discussed scenarios whereby interest rates risked remaining higher for longer or could be tightened further, conferring further pain on borrowers. It all boils back to the demand supply problem in the economy, where if demand remained stronger (perhaps thanks to tax cuts or government handouts – that’s my sidenote) or stronger than expected performance of the jobs market. In this case the cash rate might need to be noticeably higher than the market path underpinning the August forecasts.
So bottom line, the RBA minutes does not change the game on quick rate cuts, and we must continue to wrestle with higher for longer.
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