️ Highlights:
1. Australia’s quarterly inflation rate dropped to 4.1% in Q4, below market expectations of 4.3%, with moderation in most sectors including food, housing, health, transport, and education.
2. The RBA’s Trimmed Mean CPI increased by 4.2% year-on-year, down from 5.2% but still above the target band of 2-3%, with the Shadow Board strongly in favor of holding the overnight rate steady at 4.35%.
3. The Australian labor market showed signs of weakening, with a slight increase in the unemployment rate, a decline in full-time employment, and a drop in the labor force participation rate.
4. The Australian dollar weakened following the inflation numbers, with yields on government bonds declining and the yield curve showing signs of inversion in short-term maturities.
5. Consumer confidence fell slightly, retail sales declined, and consumer credit hit a new high, while business confidence improved, and the global economy remains uncertain with downside risks, particularly related to geopolitical factors and the liquidation of Evergrande.
In the latest assessment by the RBA Shadow Board, the consensus strongly supports maintaining the overnight cash rate at 4.35%, reflecting a cautious approach towards Australia’s economic adjustments. This decision comes in light of the recent drop in Australia’s quarterly inflation rate from 5.4% year-on-year in Q3 to 4.1% in Q4, a decrease that surpassed market expectations and indicated inflation moderation across several sectors.
Economic Indicators and Labour Market Dynamics
The moderation in inflation, particularly in food, housing, health, transport, and education sectors, aligns with the RBA’s Trimmed Mean CPI, which, despite a decrease, remains above the target band of 2-3%. Concurrently, the Australian labour market is experiencing adjustments, with a slight increase in the unemployment rate and a notable shift in full-time employment figures. These changes, coupled with a drop in the labour force participation rate, signal a gradual weakening yet resilience within the labour market.
Monetary Policy and Market Outlook
The Shadow Board’s stance reflects a broader sentiment of caution amidst evolving economic conditions. With a 61% probability favoring the current policy setting, the board also acknowledges a minor possibility (7%) that a rate cut could be warranted. This balanced view underscores the ongoing adjustments in the Australian economy, particularly in response to monetary tightening effects.
Currency, Consumer Confidence, and Business Sentiment
The Australian dollar’s recent weakening, alongside fluctuating consumer confidence and mixed business sentiment, further complicates the economic landscape. These factors, combined with global economic uncertainties and the potential impacts on cross-border trade and financial markets, contribute to the Shadow Board’s cautious outlook.
Conclusion
The RBA Shadow Board’s recommendation to hold the cash rate steady at 4.35% reflects a strategic response to Australia’s current economic indicators and labour market dynamics. As the global and domestic economic outlook remains mixed, this approach emphasizes stability and careful monitoring of future economic developments.