RBA Governor Michele Bullock Pours Cold Water on Rate Hike Chatter

The RBA Press Conference

On Tuesday (May 7), RBA Governor Michele Bullock held the heavily anticipated RBA press conference. Key comments included,

• Need vigilance about high inflation, with high petrol prices and services inflation influencing headline inflation trends.
• Interest rates at the right level to bring inflation to target in 2025.
• Some households are struggling to make ends meet, impacting household consumption.
• Difficult path to bring inflation to target while supporting employment growth.
• The RBA cannot let inflation take hold.
• Regarding the budget, the government has inflation in mind while considering the upcoming budget.
• Nevertheless, the RBA is in a wait-and-see mode vis-à-vis the budget.
• Governor Bullock does not think further tightening is needed unless inflation is stickier than expected.
• The Board did discuss an interest rate hike but viewed the status quo as more appropriate.
• The Australian government is looking for more steady immigration, which could lessen the impact on demand. However, immigration also contributes to the labor supply.
• Immigration does affect the housing market with higher rents.
• Tight labor market stemming from the essential services sectors. Weak consumption has impacted labor market conditions across the hospitality and retail sectors.
• Consumers are responding to higher interest rates by cutting back on spending.
• Some households are increasing savings to pay down mortgages more quickly in the elevated mortgage rate environment.
• Hours worked, youth unemployment, and part-time employment trends signaling a weaker labor market environment.
• Financial conditions are restrictive for households. However, the equity and corporate bond markets support financing for larger corporations.

RBA Rate Statement Flags Elevated Inflation

On Tuesday (May 7), the RBA left the Cash Rate unchanged at 4.35%. However, the Rate Statement highlighted concerns about inflation falling more slowly than expected toward the target range.

Salient points from the RBA Rate Statement included,

• Inflation continues to soften but at a slower pace than expected.
• Board members attribute the slower-than-expected fall in inflation to petrol prices and services inflation.
• Incoming data continues to signal excess demand in the economy and strong domestic cost pressures. Labor and non-labor inputs fueled cost pressures.
• Wage growth appears to have peaked but remains above a sustainable level, considering productivity growth trends.
• Central forecasts are for inflation to return to the target range of 2-3% in H2 2025.
• Resilient services inflation is a key uncertainty, with services inflation likely to fall more modestly than previously forecast.
• High inflation and RBA rate hikes have impacted household consumption growth.
• The RBA expects real income to increase during 2024 to support consumption.
• Board members highlighted a risk that household consumption increases more slowly than expected, which may impact growth and the labor market.
• While the economic outlooks for China and the US have improved, uncertainties stemming from geopolitics are elevated.
• The Board considers returning inflation to target within a reasonable time frame the highest priority.
• The RBA rate path to bring inflation to target remains uncertain and the board is not ruling anything in or out.

AUD/USD Reaction to the RBA Statements and Press Conference

Before the RBA Rate Statement and press conference, the AUD/USD fell to a low of $0.66172 before rising to a high of $0.66437.

However, in response to the RBA Rate Statement, the AUD/USD tumbled to a pre-press conference low of $0.65972. In reaction to the RBA press conference, the AUD/USD fell to a Tuesday session low of $0.65877. The Aussie dollar trended lower on RBA Governor Bullock pouring cold water on rate hike expectations.

On Tuesday (May 7), the AUD/USD was down 0.57% to $0.65878.