RBA Update - May 2024

The Reserve Bank of Australia (RBA) Board has decided to leave the cash rate unchanged at 4.35% at its May meeting.

This was a live meeting given the recent uptick in inflation data along with other data had put a rate increase back on the table whilst pushing out previous expectations of rate relief.

There were quite a few changes to the accompanying statement between meetings, some more subtle than others. These included:

• A specific call out that inflation is declining more slowly than expected

• An acknowledgment that dwelling investment is not weak, by omission in the May statement from the March statement

• An adjustment to the Board’s expectations of inflation hitting the middle of their target range in 2025 now more specifically stated as the 2nd half of 2025 whilst their 2026 forecast remains unchanged

• The change in their inflation expectations a function of stickier services inflation which they now expect to moderate more slowly than previously thought, with higher petrol prices in the near term not assisting

• Noted that households have been curbing discretionary spending and maintaining their saving, with risks that household consumption recovers more slowly than expected thereafter

• Noted an improvement in the outlook for the US economy and that commodity prices have picked up • The inclusion of remarks that they now remain vigilant to upside risks to inflation

We think the RBA Board has erred in fully utilising the tools at their disposal – i.e. if you’re committed to bringing inflation back into the target range, you shouldn’t flag the end of a rate hiking cycle whilst also talking soft (patience) on your commitment to getting there. Either you continue jacking up rates with a softer undertone or you stop raising rates early whilst maintaining very tough rhetoric on your commitment. They are now stuck hoping data comes their way.

Following their announcement, Australian equities rose, the AUD/USD fell very slightly, and Australian bond prices rose (yields lower). Effectively, equity investors breathing a sigh of relief whilst bond investors paid particular attention to the adjusted language in the statement.