RBA Newsflash: February 2024

Updated February 6th 2024

The RBA makes first cash rate call for the year.

The Reserve Bank of Australia (RBA) has decided to hold the official cash rate at 4.35 per cent during its inaugural cash rate decision for 2024.

The decision to hold was almost unanimously expected by bank economists and the market at large following the lower-than-expected December quarter Consumer Price Index (CPI) print released last week (31 January), which revealed the smallest quarterly increase since March 2021 of 0.6 per cent.

The ASX rate tracker as of 5 February had predicted 95 per cent “no change” and a 5 per cent chance of a decrease to 4.1 per cent.

Today’s (6 February) meeting marks the beginning of the central bank’s new process regime following the recommendations made in the RBA Review.

Going forward, the RBA will now meet eight times a year (every 6 weeks) instead of 11, with cash rate meetings being spread over two days. The board met yesterday afternoon (5 February), the first time a monetary policy meeting has occurred on a Monday in the RBA’s history.

In its post meeting statement, the RBA revealed: “While there are encouraging signs, the economic outlook is uncertain, and the board remains highly attentive to inflation risks.”

“Returning inflation to target within a reasonable timeframe remains the board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment.

“The board needs to be confident that inflation is moving sustainably towards the target range. To date, medium-term inflation expectations have been consistent with the inflation target, and it is important that this remains the case.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out,” the board added.

Last week’s inflation figures continued the trend of declining annual growth in consumer prices and increases the probability that interest rates have hit their peak in this current cycle.

Today’s decision is good news for the housing market which looks set to benefit from a more stable interest rate environment in 2024. Greater confidence around where interest rates are sitting should support further recovery in buyer and seller confidence.

While interest rates appear to have peaked, two years of high inflation have eroded real wages and, as of September, the household saving to income ratio was sitting at just 1.1 per cent. This is the lowest level seen since December 2007 at the onset of the Global Financial Crisis.

Despite this, house prices have displayed remarkable resilience, with buyer demand remaining strong relative to the supply of homes coming to market.

With annual inflation still at 4.1 per cent, the figure is still too high for the RBA to consider a rate cut, however, indicators point to inflation falling faster which may result in a rate cut towards mid-2024, instead of late-2024.

Inflation is also falling rapidly in major overseas economies, and central banks in the USA, UK and Europe are likely to consider cuts to their interest rates over the next few months.

The unemployment rate will continue to play a crucial role in the RBA’s decision-making process.

Thus far, strong employment and a low unemployment rate have given the board confidence that their monetary policy settings are not adversely impacting the jobs market.

However, monthly hours worked by Australians peaked in June 2023, and has been on a downward trend since.

Should the unemployment rate start increasing at a more rapid pace, the RBA board may choose to cut the cash rate sooner rather than later, as preserving the employment gains achieved since the pandemic is one of their key goals.