Fin-X Rapid Response - February 3rd

At its meeting today, the RBA increased the cash rate by +0.25% to 3.85%, as anticipated, and released updated forecasts. The Governor appeared slightly more hawkish than expected. However, a rapid series of rate rises still seems unlikely.

Separately, it was announced overnight that the BLS's JOLTS and labour reports would be delayed by the partial government shutdown. Meanwhile, the ISM Manufacturing survey surged into expansion territory in January despite anecdotal evidence of ongoing headwinds.

The Monetary Policy Board raised the Australian dollar cash rate by +0.25% to 3.85% today.

At the press conference, the Governor said, "The recent run of data gives the board a clear enough view that the underlying pulse of inflation is too strong. We’ve updated our assessment and outlook for the economy and concluded that the cash rate was no longer at the right level to get inflation back to target in a reasonable time frame." The comments were a little less hawkish during questions and emphasised a cautious approach.

• On the economy, the Board's text statement said:

  "While inflation has fallen substantially since its peak in 2022, it picked up materially in the second half of 2025. The Board has been closely monitoring the economy and judges that some of the increase in inflation reflects greater capacity pressures. As a result, the Board considers that inflation is likely to remain above target for some time." [Emphasis added]

  
  

  "Capacity pressures reflect, in part, the greater momentum in demand seen in recent months. Growth in private demand has strengthened substantially more than expected, driven by both household spending and investment. Activity and prices in the housing market are also continuing to pick up. Financial conditions eased over 2025 and it is uncertain whether they remain restrictive. Credit is readily available to both households and businesses and the effects of earlier interest rate reductions are yet to flow through fully to aggregate demand, prices and wages. More recently, the exchange rate, money market interest rates and government bond yields have risen following a rise in market expectations for the cash rate."

  
  

  "Various indicators suggest that labour market conditions remain a little tight and that they have stabilised in recent months, in line with the pick-up in momentum in economic activity. The unemployment rate has been a little lower than expected and measures of labour underutilisation remain at low rates. Growth in the Wage Price Index has eased from its peak, but broader measures of wages growth continue to be strong and growth in unit labour costs remains high."

  
  

  "There are uncertainties about the outlook for domestic economic activity and inflation and the extent to which monetary policy is restrictive. On the domestic side, if growth in demand is stronger than expected, and growth in the economy’s supply capacity remains limited, it is likely to add further to capacity pressures. Uncertainty in the global economy remains significant but so far there has been little or no depressing effect on the Australian economy; indeed, recent growth and trade in Australia’s major trading partners has surprised on the upside."  [Emphasis added]

• The Decision:

  "A wide range of data over recent months have confirmed that inflationary pressures picked up materially in the second half of 2025. While part of the pick-up in inflation is assessed to reflect temporary factors, it is evident that private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight."

  
  

  The Board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target."

  
  

  The quarterly Statement on Monetary Policy (SMP) added in summary that the economy is likely to grow a bit faster than previously thought, that the jobs market is expected to remain healthy, and inflation is likely to remain above the 2%-3% target until June 2027, slowing from a peak of +4.2% yoy in the middle of this year. Please see the forecasts below.

  
  

  S&P/ASX200 8,872 +1.1%, AUDUSD 0.7004 +0.8%, Aus 2yr 4.26% +7bps, Aus 10yr 4.84% +4bps

Fin-X Wealth View:

• The Governor attributed the rise in inflation to demand responding by more than anticipated to previous rate cuts. Compared to the November forecasts, growth forecasts have been increased due to the private sector accelerating by more than anticipated, and offsetting waning public demand more successfully. Supply capacity has not kept pace.

• Based on the assumed more restrictive rate path of an increase to 4.3% (taken as usual from market pricing), GDP growth is expected to fall below potential in late 2026, with unemployment steadily rising to 4.6% by the middle of 2028. This indicates that the Board might not currently intend to raise by as much as market pricing suggests. 

• That said, inflation is the dominant concern. Inflationary pressures are also perceived to have increased a little since November and to be fairly broad. The RBA assumes that inflation will be driven by demand exceeding potential supply (a positive output gap). This is extremely difficult to measure in practice and could well overstate the inflationary risks which the RBA acknowledges have been distorted by the electricity subsidies.

• Indeed, in the key risks section, the RBA states that "1. The central projection may place too much weight on the role of temporary factors in driving recent inflation outcomes" and "2. The balance of demand and supply in the economy and the labour market may evolve in a way that differs from that assumed in the central projection."  

• In our view, these factors suggest that market pricing of another two rate rises this year is likely overdone. Moreover, the Governor said that the market should understand that the cautious approach taken last year is likely to continue, so a rapid series of rate rises does not appear to be the base case.

• The 3rd cited risk is that "Risks to global activity remain tilted to the downside over the medium term, but the risks to the global inflation outlook may be shifting to the upside, particularly in the near term, because of increased geopolitical tensions and emerging bottlenecks in some supply chains". This has been attributed to trade policy, political interference, and AI demand and wealth effects. Risks to Chinese growth are "balanced."

• Last night's surge in ISM Manufacturing new orders has been attributed by some to the new tax breaks in the One Big Beautiful Bill Act, which came into effect last month. Little detail is offered in the survey, which remains at odds with the overwhelmingly negative commentary in the excerpts from company reports.

• The American House of Representatives seems likely to end the partial government shutdown tonight. However, we are told that the vote will not come in time to avoid a delay to this Friday's labour report.

  

  

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