The Reserve Bank of Australia (RBA) delivered another 25 basis points rate hike today, the fifth of this size and the tenth increase overall, bringing the cash rate to 3.6% and the highest in nearly eleven year. This was hardly a surprise as the move was widely expected, but the policy statement provided a dovish shift. 
Policy makers expect that "further tightening of monetary policy" will be required to return inflation to the 2-3% target, impliying that even just one more hike could potentially ensue, before pausing. This is clearly a more tame guidance compared to the "further increases" reference, of the previous statement. 
The headline Consumer Price Index (CPI) had surged to 7.8% y/y in the fourth quarter, in what was the biggest rise since 1990, which has forced the RBA to stay on its tightening course. However, the bank believes not only that this period of high inflation is "only temporary", but that "inflation has peaked" based on the monthly CPI data.
According to the last Statement on Monetary Policy (SOMP), officials project CPI at 6.75% in the June quarter and a further easing below 5% by the end of the year . Even if inflation has peaked though, it is not projected to return in the 2-3% target range by 2024.
Slow Growth & Tight Labor Market
The Australian economy has been very resilient, but GDP of 0.5% q/q in the fourth quarter marked the slowest growth since Q1 2021. On a yearly basis, GDP expanded by robust 2.7%, but that was a significant climb down from the prior 5.9% reading.
Policy makers acknowledged this slowdown today, expecting growth to be "below trend" over the next couple of years, as tight monetary policy weighs. According to the February SOMP, GDP is projected to expand by as little 1.5% by the end of the year and stay at these levels through 2024.
Meanwhile the labor market remains "very tight", but the central bank noted that conditions have eased "a little". The unemployment rate ticked up to 3.7% in January, but remains close to its fifty-year lows (3.4%), while wage growth continues to be a concern since it is "continuing to pick up".
The Reserve Bank of Australia provided a more dovish commentary today, compared to the hawkish tone of the previous meeting. The bank started its rate hike cycle 10 months ago and today's guidance suggests that the end is not far, as inflation has likely peaked, the economy is slowing down and the labor market shows signs of easing.
AUD/USD reacted negatively to the dovish shift, hitting the lowest levels since early January, but finds support as the European session gets underway and its trajectory will likely be determined by the policy path of the US Fed.
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
Retrieved 07 Mar 2023 https://www.rba.gov.au/media-releases/2023/mr-23-07.html
Retrieved 07 Mar 2023 https://www.rba.gov.au/media-releases/2023/mr-23-04.html