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RBA’s Growing Confidence on Inflation Sees Jump in Rate-Cut Bets
(Bloomberg) -- Australia’s central bank said it’s “gaining some confidence” that inflation is moving sustainably toward target, prompting traders to boost bets on interest-rate cuts starting as early as February.
The Reserve Bank left its cash rate at 4.35% on Tuesday in a widely anticipated decision, marking more than a year at that level. The rate-setting board said “some of the upside risks to inflation appear to have eased” and scrapped a longstanding line that it wasn’t ruling anything in or out on policy.
The Australian dollar fell as much as 0.9% and policy-sensitive three-year government bond yields dropped 8 basis points following the statement. Swaps traders boosted bets on a February easing to almost 70% from 50% the previous day, with contracts now fully pricing two rate reductions by May.
Markets, economists and lawmakers had taken an increased interest in the RBA’s final meeting of the year after the economy recorded another disappointing reading last week. The dovish tilt in Tuesday’s policy statement keeps the government’s hopes alive of policy easing ahead of an election due within six months.
Governor Michele Bullock said the board wanted to convey that it has noticed the weakness in the private sector of the economy and an improving balance between supply and demand. She added that while core inflation is still too high, it is moving in the right direction.
“Recent economic data have been mixed and some indicators are softening in line with our forecasts,” she told a press conference after the decision. “This has given the board some confidence that inflationary pressures are declining, but risks remain.”
Deutsche Bank AG said it was bringing forward its forecast for a first rate cut to February from May following the central bank’s “dovish tilt.”
The RBA has been an outlier among central banks this year as it stood pat while counterparts like the Federal Reserve embarked on easing cycles. Australia didn’t go as restrictive on policy as most peers and as a result it’s taking longer for core prices to return to the RBA’s 2-3% target.
Economists and markets had been looking for a turn away from the central bank’s rigid concern about inflation’s trajectory after recent weaker data.
“The statement accompanying the decision made an unambiguous shift in the dovish direction,” said Gareth Aird, head of Australia economics at Commonwealth Bank of Australia. “The governor’s tone in the press conference was very much consistent with the shift in message conveyed in the statement.”
Bullock was asked by a reporter whether the board considered lowering rates at today’s meeting, and she responded that it hadn’t “explicitly,” though policymakers did discuss whether current settings were appropriate.
When asked whether traders had overreacted in boosting pricing for a February cut and penciling in two reductions by May, the governor said she thought the bank had been clearly conveying its reaction function.
“I don’t want to endorse a particular market path,” she said. “But am I surprised that the market has reacted? No I am not.”
Looking ahead, there are some signs the economy has begun to pick up this quarter, led by consumer spending. The labor market also remains a bright spot. Figures due later this week are expected to show unemployment nudged higher to 4.2% in November, from 4.1% in the prior month. The RBA’s forecast is for the jobless rate to end the year at 4.3% and then peak at 4.5% from late 2025.
Bullock was also asked about the new monetary policy committee due to be established in March after the passage of amendments to the RBA Act.
The governor said that together with the treasury secretary and an unnamed independent director she had made recommendations on potential new members to Treasurer Jim Chalmers.
Chalmers will make the final appointments.
Bullock said she was relatively agnostic on whether unattributed votes by the new board should be published and whether they should deliver public speeches. She said she would like to consult with its members once they are in place.
Asked what she had made of the new arrangements in her first full year of press conferences, the governor said it’s been “a bit of a wild ride for me.”
--With assistance from Shinjini Datta, Garfield Reynolds and Matthew Burgess.
(Adds latest market reaction, governor’s comments from press conference.)