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Economists predict rate cuts by the end of the year as the bank's latest monetary statement reveals a "shift" in tone.
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RBA 'cautiously' holds, ends hawkish stance
20 March 2024
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10 minute read
Economists say there were “no surprises” in the RBA’s “cautious” decision to hold interest rates but a shift in the bank’s tone suggests rates have peaked, with cuts predicted for later in the year.
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The RBA’s decision to leave the cash rate unchanged at 4.35 per cent marked the third consecutive hold after a spate of 13 hikes between May 2022 and November 2023.
It said in its monetary statement yesterday “the path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain" and that it would be “ruling anything in or out”.
AMP chief economist Shane Oliver said this was a “dovish tilt” and predicted rate cuts starting around mid-year.
“The RBA left the cash rate on hold at 4.35 per cent as widely expected. The RBA noted progress in reducing inflation and bringing demand back towards supply, but it continues to note that inflation remains too high with concerns about growth in unit labour costs,” he said.
The RBA said “there are encouraging signs that inflation is moderating”, noting that inflation had continued to moderate in line with its recent forecasts. Labour market conditions had also eased “gradually” and wages growth peaked “with indications it will moderate over the year end”.
However, it said that “the economic outlook remains uncertain”, with inflation still weighing on real incomes and a risk of persistent services price inflation.
“While there have been favourable signs on goods price inflation abroad, services price inflation has remained persistent and the same could occur in Australia,” it said.
“Domestically, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand, and while the labour market remains tight. The outlook for household consumption also remains uncertain.”
Oliver said: “While the overall statement still sounds hawkish, suggesting no rush to cut, its final paragraph was neutral with the board ‘not ruling anything in or out’ on interest rates.”
RSM chief economist Devika Shivadekar said this “slight shift” in tone could be good news for borrowers.
"We will not call it a dovish shift, but it certainly highlights a more fluid approach to policy considering the extent of uncertainty in the current economic landscape," she said.
"There were no surprises in the RBA's decision today to hold the cash rate steady … today's cautious hold shows the RBA treading very carefully around non-tradable inflation risks amid 'excess demand in the economy’.”
When asked about the change in language during the bank’s press conference, governor Michelle Bullock said: “We have changed the language that’s true, but that was in response to some data, which has demonstrated to us that we are still broadly on the path we thought we were on.”
BDO economist Anders Magnusson said rate cuts would rely on a productive recovery, which the RBA “continues to cautiously assume will occur this year”.
The RBA held rates because the economy had performed according to the RBA’s expectations, he said. Recent changes to stage three tax cuts and aged care workers’ wages might “delay the need for a rate cut for a short time”.
“Overall, the economic indicators continue to fulfil RBA’s wish list of favourable labour market and inflation outcomes. Given the current momentum, I expect rate cuts to begin late this year.”
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