In brief

• The Reserve Bank of Australia (RBA) left its overnight cash rate (OCR) unchanged but its statement was more hawkish than expected.
• While acknowledging easing inflation, the RBA noted that a sustainable return to target range is still some way off.
• The current high rates and upward sloping yield curve present relatively attractive investment opportunities AUD cash investors.
  

At its first monetary policy meeting of 2024, the RBA left its OCR unchanged at 4.35%. The decision was in-line with market expectations, although the tone of the accompanying statement was more hawkish than expected, with the board pushing back on investor expectations of early rate cuts, observing that inflation “remains high” and “it will be some time yet before inflation is sustainably in the target range”.

Exhibit 1: The RBA left OCR unchanged at a 12-year high; Bank Bill Swap yield curve has flattened on expectations that rates had peaked

Source: RBA, Bloomberg and J.P. Morgan Asset Management; data as at 6 February 2024.

Gradual progress

The RBA acknowledged that “inflation continued to ease” as higher interest rates and looser labour market conditions helped balance supply and demand, although it believes demand remains above the economy’s long-term capacity, placing upward pressure on prices. This is visible in price trends, with goods inflation falling faster than previously forecast while service inflation has “declined at a more gradual pace”. The central bank now forecasts inflation will only return to its target range of 2-3% in 2025 and to the mid-point by 2026 – suggesting limited tolerance for any signs of more persistent price pressures. 

Meanwhile, the RBA’s economic outlook was less explicit. The bank predicts wage growth will stabilise as productivity increases while unemployment would edge higher. It admitted the economic outlook is uncertain, impacted by geopolitical concerns, domestic consumption patterns and monetary policy lags.

Notably, this was the first policy meeting following revisions to the RBA’s communication policy with the Statement on Monetary Policy being released concurrently and Governor Bullock hosting a press conference 1-hour after the statement was released. Following the announcement, the AUD strengthened and bond yields moved higher as investors pushed out expectations of future RBA rate cuts.

Exhibit 2: Inflation has trended down from Q4-22 peak, while unemployment has edged higher.

Source: Bloomberg and J.P. Morgan Asset Management; data as at 6 February 2024.

Investor implications

The statement’s conclusion reaffirmed the RBA’s commitment to “returning inflation to target within a reasonable timeframe”. While acknowledging that the future path of interest rate would be data dependent, the bank hawkishly suggested that “a further increase in interest rates cannot be ruled out”. In the subsequent press conference, Governor Bullock confirmed that inflation was the overwhelming focus, with the board looking for reassurance that it was on a sustainable path back to target.

Despite the RBA’s renewed tightening bias, we believe interest rates have peaked. For AU$ cash investors, the currently high rates and upward sloping yield curve continue to present relatively attractive investment opportunities for cash balances. However, given the uncertain economic backdrop and narrow path for the RBA to achieve its policy goals, we believe a diversified strategy across instruments and maturities remains warranted.

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