The RBA is set to leave the cash rate on hold at 4.35% at its final meeting for 2024 today (decision due 2:30pm AEDT). The Board has held an unchanged stance on rates since November last year, consistently pushing back against prospects for rate cuts in Australia as the global easing cycle has ramped up. The RBA looks likely to maintain this narrative into its summer break; however, markets sense a rate cut is on the radar for early 2025.
Much of the interest around today's meeting will be the RBA's response to the dovish repricing of the rates outlook in Australia. After seeing GDP growth for Q3 come in at a soft 0.3% last week (see here), markets moved to price in an earlier start to RBA easing - pulling forward the timing of a 25bps cut to April from June 2025 anticipated after the previous meeting - while also lowering its expectation for the terminal rate from 3.75% to 3.5%.
Accordingly, the 3-year bond rate now trades around 3.8%, down from around 4.10% post the RBA's November meeting. The backdrop of lower rates has weighed on the Australian dollar, which has fallen by around 1.7% on a trade-weighted basis over the inter-meeting period; however, US dollar strength has been (by far) the driving factor following Trump's victory in the US election.
All else equal, lower rates and a weaker AUD are not what a relatively hawkish RBA would welcome. That is unless the RBA saw enough warning signs in the Q3 GDP report to start softening its guidance of needing to 'remain vigilant to upside risks to inflation' and that maintaining a 'sufficiently restrictive' stance on rates continues to be appropriate. This appears an unlikely scenario given Governor Bullock's recent CEDA speech (28 November) focused on the familiar themes of elevated underlying inflation, demand exceeding supply, and tight labour market conditions.
Soft GDP growth makes some of those assessments more contestable, but probably not to the extent where the RBA changes course to indicate that near-term rate cuts are now on its radar. One of Governor Bullock's main observations was that rates in Australia are still less restrictive than in many countries overseas where central banks have already eased monetary policy. This has been a by-product of the RBA's strategy to raise rates less aggressively to preserve the labour market while still placing downward pressure on inflation.
Overall, expect the Board to hold its line into year-end of remaining vigilant to inflation risks and maintaining rates at a sufficiently restrictive level. Over its summer break, the Board will emphasise that it will pay close attention to the data both domestically and overseas.
