Last week's hotter-than-expected inflation report in Australia looks to have closed the door on an RBA rate cut at today's meeting, with the cash rate expected to be held at 3.6% (due 1430 AEDT). This point has been arrived at after a tug of war in market pricing has played out over recent weeks. Initially, expectations for a 25bps cut rose sharply following weak labour market data. Cautious RBA commentary then tempered those expectations before markets threw in the towel on a rate cut as inflation reaccelerated to the top of the target band in the September quarter. Markets see the RBA cutting again in this easing cycle, though not until well into next year. New forecasts to be published alongside today's decision in the Statement on Monetary policy will be key to the rates outlook, as will Governor Bullock's post-meeting remarks.
The RBA's sequence of quarterly rate cuts that has seen the cash rate fall by 75bps this year is set to be broken today. Confirmation of inflation declining towards the 2-3% target band in the key quarterly CPI data paved the way for rate cuts in February, May and August. But a setback occurred last week as headline CPI in the September quarter rose from 2.1% to 3.2%Y/Y and the core or trimmed mean firmed from 2.7% to 3%Y/Y, outcomes that indicated inflation picked up more quickly than the RBA had been expecting.
As a result, the RBA's year-end forecasts for headline CPI of 3% and core CPI of 2.6% are likely be revised higher. That may have implications for the return of both measures to the midpoint of the target band, currently not forecast until 2027; however, that is less clear cut. Market pricing, which the RBA inputs into its projections, has shifted hawkishly such that the cash rate is now expected to bottom out around 3.3% compared to around 3% previously.
Stronger-than-expected inflation will not only be viewed in terms of the target band but also what it implies about economic conditions more broadly. Notably, it gives weight to the RBA's assessment that the labour market remains tight, even though the unemployment rate crept up to average 4.3% in the September quarter, in line with the RBA's forecasts. This suggests that associated risks to inflation from labour costs will remain relevant for policy. Higher inflation might also be taken as a sign of the strength in demand in areas including household consumption and the housing market, supported by the RBA's earlier rate cuts.
