RBA September Board meeting – on hold and no change to the script

Ryan Felsman

Investor Implications from CommSec Economics – What does it mean for investors?

• The Reserve Bank of Australia (RBA) held its official cash rate steady at a more than 12-year high of 4.35% for a seventh successive meeting today, as widely expected, in contrast to central banks in the US, Canada, Europe, UK and New Zealand that have already begun cutting borrowing costs.
• A resilient labour market and sticky housing and services inflation continue to force the RBA Board to retain its higher-for-longer interest rate stance.
• The attending monetary policy decision statement retained the neutral forward guidance that the Board is not “ruling anything in or out” and that “policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range”.
• On inflation, the RBA said, that “inflation has fallen substantially” but noted that, “while headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high.” The statement also added, “Headline inflation is expected to fall further temporarily, as a result of federal and state cost of living relief. However, our current forecasts do not see inflation returning sustainably to target until 2026.”
• The RBA also reiterated language on the tightness of the Aussie labour market, suggesting that, “Broader indicators suggest that labour market conditions remain tight, despite some signs of gradual easing.” The statement also noted wage pressures had “eased” but the labour market remained “tight” overall.
• So what could cause the RBA to pivot towards an easing of monetary policy?
  • The latest national accounts continued to show anaemic economic activity, with gross domestic product (GDP) rising by 0.2% in the June quarter and annual growth decelerating to 1% – the weakest annual rate in 32 years outside of the Covid-19 pandemic. While the headline outcome was in line with the RBA’s August Statement on Monetary Policy (SMP) forecast, household consumption was well below policymaker’s expectations, contracting 0.2% in the quarter. More timely retail trade and credit/debit card spending in July point to ongoing softness in consumer spending and a desire to save the ‘stage 3’ personal income tax cuts, effective from July 1, 2024.
  • On prices, year-on-year growth in the monthly headline consumer price index (CPI) indicator dipped 30 basis points to 3.5% in July, with the trimmed-mean measure easing to 3.8%. The monthly CPI data for August, which will be released tomorrow, is expected to show a sharp fall in annual headline inflation to 2.7%, reflecting lower electricity prices due to government subsidies, seasonally lower holiday prices and weaker petrol prices. The trimmed mean measure of CPI could slow by 40 basis points to 3.4% in August.
  • Labour market data has also continued to soften. July’s labour force survey showed a 10 basis points increase in the unemployment rate to 4.2%. While August’s data showed an unchanged unemployment rate, a range of leading indicators of labour demand continue to soften. Data on the wage price index (WPI) in the June quarter 2024 also showed a sequential deceleration in wages growth.
  • Yesterday, S&P Global and Judo Bank reported that the Australia composite purchasing managers’ index (PMI) – a leading indicator of GDP – fell to an eight-month low of 49.8 points in September, with overall business activity declining amid a prolonged manufacturing downturn. Importantly, business price pressures eased, with falling input cost inflation enabling firms to raise selling prices at the softest pace since December 2020. The NAB’s August business survey also showed inflationary pressures easing, with final product price and purchase cost growth easing to levels last seen in early 2021.
• Commonwealth Bank (CBA) Group economists continue to forecast the September quarter 2024 trimmed mean CPI to print below the RBA’s expectations, when released on October 30. Alongside a slowdown in economic growth, that could prompt a shift in the RBA’s stance towards policy easing in December 2024.
• Money market traders continue to be more “dovish” than policymakers, pricing a 59% chance of a 25-basis point reduction for December according to LSEG data, though this is down from 64% before today’s decision and 90% in early September.
• With traders expecting the US Federal Reserve to follow-up its jumbo interest rate cut of 50 basis point last week with at least another 50 basis points worth of cuts by year-end, the divergence in rate expectations, continues to underpin the Aussie dollar (AUD).
• During Tuesday’s local session, the AUD rose in response to “dovish” Fedspeak overnight that pushed commodity currencies higher. The Aussie also got support from policy stimulus measures announced by the People’s Bank of China (PBOC) this morning, as detailed below. The measures weakened the Chinese yuan (CNY) slightly in offshore trading. The AUD also lifted from US68.43 cents to US68.68 cents – the highest level since December 28, 2023 – immediately after the RBA’s rate decision at 2.30pm AEST, where it reiterated its hawkish stance.
• Australian bonds climbed in early trading on Tuesday ahead of the RBA’s policy decision. The yield on the rate-sensitive 3-year note fell by 5 basis points to 3.50% in early trade but rose back up to 3.55% after the RBA’s decision before falling back to 3.50% at the time of writing.
• Australian shares edged lower for a second consecutive session on Tuesday, down from Friday’s record high, following a seven-day rally. Interest-rate sensitive financials shed 1.8%, with all the “Big Four” banks trading down. Consumer staples were another weight, down 1.7%, with Coles down 2.6% and Woolworths shedding 2.4%, after the country’s consumer regulator on Monday filed lawsuits accusing the supermarket giants of misleading shoppers about discounts. But miners gained 3.1%, as the Singapore benchmark iron ore prices spiked 4% on Beijing’s stimulus package. Sector heavyweight BHP jumped 3.5%, while Rio Tinto climbed 3.9%. At the time of writing, the benchmark S&P/ASX 200 index was down by 0.04% to near 8,150 points after reaching session highs of 8,172.7 points late in the morning session.
• While today’s RBA decision was expected, it could be a day to remember for China’s monetary policy, with significant policy stimulus measures finally rolled-out.
• The People’s Bank of China (PBOC) unleashed a barrage of measures to shore up the country’s struggling economy this morning, from cuts to interest rates and reserve requirements to making central bank funding available for investors to purchase stocks. Details are as follows:
  • China’s central bank will cut banks’ reserve requirement ratio (RRR) by 50 basis points to 9.5% and further reduced key interest rates to support a recovery in prices, PBOC Governor Pan Gongsheng said on Tuesday. Governor Pan also said the seven-day repo rate will be cut by 0.2 percentage points to 1.5% and deposit and other interest rates will fall as well.
  • Additionally, funds and brokers will now be able to access PBOC funding to buy stocks.
  • Interest rates on existing mortgages will also be reduced by 0.5 percentage point on average and the minimum down-payment ratio will be reduced to 15% from 25% for second-home buyers, with the easing of lending conditions providing some relief to households.
  • Finally, business activity will be encouraged via mergers and acquisitions (M&A) measures.
• Delivering a volley of stimulus measures all at once is highly unusual and possibly speaks to the urgency felt by Beijing policymakers to head-off deflationary risks and get economic (GDP) growth back on track in an attempt to hit this year’s 5% annual target. 
• Chinese stocks rose broadly on Tuesday, and bonds rallied following the announcement, with China’s blue-chip 300 stock index up 3.8%. The 30-year treasury futures for December delivery rose to a record high. China’s yuan (CNY) initially weakened about 0.2% in offshore trading after the PBOC’s announcement but was last trading around 7.0370 per US dollar (USD).

By Ryan Felsman