The Reserve Bank of Australia Held Rates, Maintaining a Dovish Bias

RBA Dovish Hold

Back in October, the Reserve Bank of Australia had raised rates at 4.35% and the highest level since 2011, to be more assured that inflation would return to target. However, it had made a dovish change to its language around future moves, saying that "whether further tightening of monetary policy is required" would depend on the data. As such, Tuesday decision to keep rates unchanged, did not come as a surprise and was in line with market expectations, while the watered-down rate outlook was also maintained. ^[1]

Inflation has been coming down from its peak and the Board believes that the limited information since the last meeting, were "broadly in line with expectations", with October CPI easing to 4.9% y/y. The Wage Price Index soared in Q3, growing at the fastest pace in the twenty six years of the series (1.3% q/q). However, policymakers don't believe it will increase much further and still view it as "consistent with the inflation target".

Governor Bullock has hawkish cred after hiking rates in just her second decision at the helm of the RBA and her recent commentary have been on the aggressive side, while the next meeting is not due until early February. That creates space for officials to stay on the sidelines, allowing them to adopt a careful stance and assess important incoming releases. Overall, today's decision constitutes a dovish hold, which sends AUD/USD lower.

The vague rate outlook sustains uncertainty though and policymakers may need to tighten further to restore price stability. Inflation has moderated substantially, but they don't expect it to hit the top of the 2%-3% target range for another two years. Although not high enough to cause a wage-price spiral, historically elevated pay growth makes controlling inflation harder. Unemployment rose to 3.7% in October and the labour market conditions have eased, but they remain tight.