With inflation already in the RBA's target band, all eyes were on the cash rate this Melbourne Cup Day
The cash rate has been maintained at 0.1% despite inflation moving into the Reserve Bank of Australia’s target band last week.
Economists have been taking a punt on whether the RBA would hike the cash rate ahead of its forward guidance of 2024 for several months. Inflation is one of the crucial components underpinning the central bank’s reaction function, with this needing to fall sustainably within its target band of 2-3% before the RBA considers upping the cash rate.
But, just last week, global inflationary pressures saw inflation rise to just over 2% - a factor that has led many economists to predict a change in forward guidance. Despite this, most agreed that the RBA wouldn’t hike the cash rate without warning at today’s monthly meeting on monetary policy.
ANZ head of economics David Plank told MPA the RBA change of forward guidance was a crucial step.
“There was no expectation that the RBA would change the cash rate,” he said. “What was really important was that they shifted their timing. Before they characterised that they wanted to see inflation sustainably within the band and higher wages but they didn’t think that would happen until 2024. Now, because of better data and what has been happening globally, they’ve changed their forecast and brought it forward. We’re going to get earlier rate hikes than 2024 but it’s still some way off, which is why they didn’t move the cash rate.”
“We have seen tentative signs of re-emerging inflationary pressures, albeit heavily influenced at this stage by COVID-related pressures,” said CreditorWatch chief economist Harley Dale. “Bond yields are rising, and the Aussie dollar has recovered some ground. The rapid easing in lockdown restrictions has opened pent-up demand for consumer services. Many businesses are set to go and as vaccination levels reach the critical levels required, the outlook is positive.”
He said while today’s decision was an important one, the December announcement would be critical.
“As economic conditions move in a way that is sometimes evolving and sometimes revolutionising, the RBA is sticking to its record low interest rate policy, but not necessarily the timing of it,” he said. “On December 7th we will receive the final RBA statement until February 1st, 2022. The December statement will be a key update given the Bank will have had the opportunity to scrutinise an increasing amount of information regarding post lockdown economic outcomes.
“The December RBA Monetary Policy Announcement will be the most important of 2021, followed by the Melbourne Cup Day update. November 2nd is race day; December 7th is game day.”
