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LUCI’S CALL: RBA takes heart from cooling inflation

04:45pm March 20 2024

The Reserve Bank Board left the cash rate unchanged at 4.35 per cent at its March meeting, as widely expected.

Inflation is coming down broadly in line with the RBA's most recent forecast. Growth is slow, but the Reserve Bank sees this as necessary because they believe that the level of demand in the economy still exceeds supply and they’re trying to bring these into balance.

The Board will have been heartened by the recent declines in inflation, and you can see that in some of the language changes in the latest media statement. 

Last month they didn't rule out a rate hike at the March meeting, while now they’re saying that they’re not ruling anything in or out. This is the language that emerged during Governor Michele Bullock’s media conference after the last meeting, and the Board has retained that language this month.

Still, the Board remains mindful of the uncertainties around their base case forecast.

They're conscious that growth is slow and that households are hurting, but they're also concerned about rising unit labour costs and whether or not productivity growth picks up as they expect.

The Board is still committed to ensuring that inflation returns to the 2 to 3 per cent target range, but no longer expects that it will need to take additional policy action to do so.

At Westpac Economics, we retain our view that the cash rate is likely to be on hold for a while.

By the time we get to the late September meeting, the RBA will have the full suite of data for the first half of this year. We expect that will bring enough reassurance that inflation is coming down on the trajectory they want and will continue to do so.

If things do turn out as the RBA expects, they will have seen productivity growth continue to pick up and wages growth start to slow.

As a result, we've become more confident that the next rate move will be down, but no earlier than September.

You can read Luci’s note in full on the WestpacIQ website

Luci Ellis is Westpac’s economic spokesperson and is responsible for all of our economic research. She was previously Assistant Governor (Economic) at the Reserve Bank of Australia from December 2016 until October 2023. Prior to that, Luci was Head of Financial Stability Department at the RBA for eight years, spent two years on secondment at the Bank for International Settlements in Basel, Switzerland, and held several other senior positions at the RBA over a three-decade career in central banking. Luci has been a member of the Australian Statistics Advisory Council, the statutory advisory body to the Australian Bureau of Statistics, since November 2015. Luci holds a PhD from the University of New South Wales, a Masters in Economics degree from the Australian National University and a first-class Bachelor of Commerce (Honours) degree from the University of Melbourne.

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