RBA Newsflash: October 2023

Updated October 3rd 2023

The Reserve Bank makes its first cash rate decision with Michele Bullock as its governor.

Michele Bullock, governor of the Reserve bank of Australia

The Reserve Bank of Australia (RBA) has decided to hold the official cash rate at 4.1 per cent for the fourth consecutive month following its October monetary policy meeting.

Notably, the October board meeting has marked the initial meeting with Michele Bullock presiding as the central bank’s governor.

Ms Bullock assumed the role of governor on September 18 following the retirement of former governor Philip Lowe after his seven-year tenure in the position.

On the decision, Ms Bullock said: “The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast period and with output and employment continuing to grow. Inflation is coming down, the labour market remains strong and the economy is operating at a high level of capacity utilisation, although growth has slowed.”

Ms Bullock further noted: “There are significant uncertainties around the outlook. Services price inflation has been surprisingly persistent overseas and the same could occur in Australia.”

“There are also uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages respond to the slower growth in the economy at a time when the labour market remains tight.”

“The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income,” Ms Bullock said.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks.”

The decision to hold the cash rate steady came as ongoing weak retail trade and consumer confidence gave the RBA the clear signal that their efforts to reduce demand in the economy have worked very well.

While some items in the Consumer Price Index (CPI) ‘basket’ continue to record price rises, these rises are by and large not related to high consumer demand, and therefore not enough to convince the RBA to move again to cool demand further.

All groups monthly CPI rose 5.2 per cent over the year to August, up from 4.9 per cent the month prior. Whilst a higher figure is not welcome news for the RBA, the figure is heavily impacted by the higher cost of fuel this month.

The economy appears to be maintaining a steady slowdown and that business activity is not falling precipitously so far.

Economic conditions are expected to further soften in the coming months as the significant increase in mortgage servicing costs, together with cost-of-living pressures, has seen consumer spending slow and weigh on economic activity.

The unemployment rate remained at 3.7 per cent in August, but the tight labour market is expected to ease ahead, with expectations the unemployment rate is set to edge higher.

Unless there is a shift in the disinflationary outlook, it’s likely the peak in the cash rate is already in for this monetary policy tightening cycle.

The decision to hold the cash rate will underpin buyer and seller confidence for the spring selling season.

Looking ahead, interest rates have very likely peaked and population growth is rebounding strongly.

Together with a shortage of new home builds, prices are expected to rise and more markets will likely reach new record levels after recouping last year’s fast falls.

A hold was widely expected

Prior to the decision, the consensus among the market and economists alike was that the cash rate hit its peak in June 2023, and will continue to remain that way.

Major banks Westpac, ANZ, and the Commonwealth Bank of Australia (CBA) once again predicted another hold in the cash rate following the October board meeting.

Economists from these major banks previously confirmed that the next movement in the cash rate will likely be rate cuts over 2024.

Westpac chief economist Bill Evans added that the monthly CPI data for August was “unlikely to be a game changer” despite annual inflation rising in the 12 months to August, which primarily reflected “a 9 per cent lift in petrol prices”.

An outlier in the conversation of the cash rate peak, NAB also predicted a hold in October, however still forecast one final cash rate hike to a peak of 4.35 per cent next month (November 2023).