Reserve Bank of Australia sees flexible path forward

Summary

• The Reserve Bank of Australia (RBA) raised its Cash Rate by 50 bps to 1.85% at its August meeting and signaled that further rate hikes will be needed to bring inflation back toward target over time.
• Several elements of the monetary policy announcement were essentially unchanged from previous meetings. However, there were also some important changes in language that lead us to believe the RBA will revert to smaller hikes going forward. Notably, the central bank indicated that while further normalization of policy is expected in the months ahead, it also noted that policy is “not on a pre-set path”. The RBA also dropped references to “extraordinary monetary support” that had appeared in previous announcements, suggesting it now sees itself a bit further along the monetary tightening path, and perhaps does not need to move at an accelerated 50 bps pace anymore. Given these changes, we believe the RBA will be more flexible moving forward with regard to the size and timing of future rate hikes.
• With signals of further tightening but more flexibility, we now expect 25 bps rate hikes at the RBA's next several meetings in September, October, November, December and February, which would see the Cash Rate peak at 3.10% by early next year.

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