A short-term cut in cash rates “is not consistent with the board’s current thinking”, according to RBA governor Michelle Bullock, who clarified that risks remain in the economy and that the RBA board had in fact considered raising rates at its last meeting.

The RBA kept rates at 4.35% in August, in line with market expectations, after last week’s softer-than-expected inflation for the June quarter.

However, the RBA board is keeping a close eye on the data and is not deciding anything in or out, Bullock reiterated at his post-meeting press conference.

“If it looks like inflation is not following the way we forecast, then [the board] if necessary, will increase rates,” she said.

She pointed out that overseas experience had shown how "bumpy" inflation can be on the way down and across the economy, prompting the central bank to remain cautious.

Raising rates "was a very serious consideration," Bullock warned.

"There were only two things on the table -- holding and accepting that we might have to hold for a while or raise -- and I think the board felt that the risks of raising at this point, as opposed to holding, where we are and simply staying where we are justified the second alternative, which we did."

The governor also touched on market expectations for a rate cut by the end of 2024, as predicted by a number of market experts for November 2024.

However, the board was reluctant to pursue a rate cut in the "short term," which she clarified meant until the end of the year or the next six months.

"Given what the board knows right now and what the projections are, it doesn't align with their thinking to cut interest rates right now," Bullock said.

Responding to questions from the media about the possibility of a recession, the RBA governor also underlined the belief that Australia is "on that narrow path".

"That being said, we are dependent on the data and there are a number of things, as we mentioned in the monetary policy statement, that could lead to the economy slowing much faster and inflation falling much faster than we expect, and we will have to to be on the lookout for them,” Bullock said.

She continued: “If they happen, then yes, interest rate cuts will be on the agenda. But right now, given what we know and the predictions, [in] in the near future, interest rate cuts are not on the agenda."

Monitoring volatile markets

Bullock confirmed the volatility in global financial markets over the past few days, which sent the ASX down around 3.7% on August 5 to its worst two-day performance since 2022. so far, was also discussed by the board at its last meeting.

"In part, [the volatility] it reflects the markets adjusting to economic news at a time when there is already significant uncertainty about the outlook, and we will be monitoring that as you would expect,” she said.

She clarified that this did not play a role in the decision-making process, but remains interesting and will be watched closely.

The trigger for volatility, she said, comes from a realignment of market expectations following low US employment and rising interest rates in Japan.

“We had some briefings on that, it was really just to understand what was going on and what the reasons were. I think there was a little bit of a sense that it was a bit of an overreaction in some ways -- it was one number -- but it was a reassessment by some parts of the market in terms of the U.S. economy," she said, clarifying the board's assessment of "how much of a signal" must take from the events.

"I don't think they took much from him, but they accepted that they just had to keep an eye on him."

Economists react

In its post-meeting statement, the RBA said the economic outlook was "uncertain" and the latest data showed the return of inflation to target was slow and uneven.

He made clear that core inflation remains too high and recent forecasts suggest it will be some time before inflation reaches the target range sustainably. With that, the RBA said policy would need to be "sufficiently restrictive" until the board could be confident that inflation was moving sustainably towards the target range.

Following the interest rate decision, Krishna Bhimavarapu, Asia-Pacific economist at State Street Global Advisors, highlighted the RBA's "dovish pivot" as it now projects core CPI to fall to 3.0 percent on an annualized basis by December 2024. which is a decrease of 3.8 percent.

"The most important thing is that the bank is now anticipating [a] a higher unemployment rate, also in line with the risks we fear. The bank balanced them by raising the subdued average inflation,” Bhimavarapu said.

“The RBA also seems disinterested in cutting interest rates without any clear and substantial progress, as they are not allowing for cuts in their updated forecasts. We think the outcome is well balanced, but we still maintain our forecast for the first rate cut in November this year with the same risks even after today's meeting.

Betashares' chief economist, David Bassanese, pointed out that the bank "appears to retain at least a slight tightening bias."

"Even if the US Federal Reserve cuts interest rates next month, the RBA is unlikely to follow suit at its next policy meeting in September – unless there is further extreme volatility in the stock market and/or signs of a faster-than-expected decline in inflation ,” Bassanese said.

He maintains that the first rate cut will come in February next year, after December's quarterly consumer price index report on January 29, "which I expect will show a slowdown in annualized average inflation to 3.25 percent, or slightly below -down from the RBA's last forecast of 3.5 per cent”.

Emma Lawson, fixed rate strategist at Janus Henderson, echoed the view that the RBA is unlikely to start an easing cycle before Q1 2025.

“The outlook remains complex amid a myriad of competing pressures in the economy and from geopolitical and structural pressures. Australia's economy is slowing slightly and although a recession is not forecast, the pressure from higher interest rates is expected to continue to spread across sectors of the economy,” she said.

"Inflation remains high and is slowly decelerating. The RBA must balance these risks along their so-called narrow path. A prolonged period of restrictive policy will further slow growth, rebalance the labor market and reduce inflation.

The global economic backdrop is slowing, she noted, but a growing number of geopolitical and structural concerns, such as elections and sovereign debt concerns, are raising market volatility risks.

“Our base case is for the RBA to remain on hold at current rates before starting an easing cycle in Q1 2025. "We estimate a more modest than historical average easing cycle of about 175 basis points spread over an extended period," Lawson said.