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Analysis: Is the RBA as dovish as they sound?

• RBA pricing has come in over the past week, partly on the back of recent remarks by RBA Deputy Governor Bullock. While the RBA’s November SoMP forecasts had inflation above the band in 2024 (even with a cash rate assumption of around 3½%), Ms Bullock emphasised the RBA is leaning heavily on the flexibility of the inflation target in order to “preserve some of the gains” seen in the labour market.
• In this Weekly, we explore recent RBA communications and forecasts and what it means for the path forward. It is clear there is a very high bar to step back up to 50bp hikes. That leaves three key questions: 1) How far does a string of 25bp hikes extend?; (2) When does the RBA stop hiking at each meeting or pause for an extend period; and (3) Does downshifting and emphasising flexibility risk entrenching higher inflation and require an ultimately higher terminal rate?
• Recent RBA communications over the past few weeks include two appearances from Deputy Governor Bullock, the RBA Minutes, and the most recent SoMP. Key insights from these were:
  • The RBA is intending to use the flexibility in the inflation target to preserve gains in the labour market amid high uncertainty about the impact from prior monetary tightening on the household sector, seemingly happy to run the risk on inflation and wage expectations which it sees currently as being consistent with the inflation target. Ms Bullock noted “we have a flexible inflation target for a reason” and that the RBA isn’t opting for “scorched earth,” favouring preserving “some of the gains while you bring it [inflation] down”
  • Today’s Minutes repeated the Board “expects to increase interest rates further over the period ahead,” Notably, the Board considered but opted against the case for a 50bp move in November emphasising consistency, lags in monetary policy, and pressure on household budgets. We interpret that as meaning it is very unlikely the RBA will revert back to 50bp increments in this cycle, but it also likely means 25bp hikes are almost certain for December and February.
  • After more hikes in the near term, a pause is likely at some point, which could still entail a hiking bias given how high inflation is. Headlines from Ms Bullock’s Senate Estimates appearance gave the impression a pause could be imminent as rates were getting to the point where “maybe, there might be an opportunity to sit and wait and look a little bit.” But that was in response to a Senator suggesting interest rate hikes were counterproductive and quickly clarified with “we think interest rates probably have to go up a little bit further.”
  • NAB continues to see the RBA hiking rates by 25bps in December, February, and March, taking the cash rate to 3.60%. We expect the RBA to pause thereafter as it assesses the impact of the considerable monetary tightening in place. A key uncertainty for the outlook remains around the response of the household sector to the considerable tightening put into place to date.

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