The RBA's extended hold on the cash rate at 4.35% since November 2023 looks set to end with a 25bps cut expected at today's meeting (decision due 1430 AEDT). Although the labour market remains robust, increased confidence in the inflation outlook led the Board to soften its long-held resistance to lowering rates at its final meeting in 2024. An encouraging Q4 CPI report in late January showing inflation in and around the 2-3% target band should prove to be the green light for the Board to start dialling back the restrictive policy settings that were calibrated to deal with inflation that peaked around 7-8%. Markets are pricing in a gradual easing cycle through 2025 to a cash rate of 3.6%.
One might argue that a cut today is not the done deal markets largely assess it to be. After all, the RBA has effectively not been sighted since going on its summer break, the last piece of policy-related communication coming on Christmas Eve when the minutes of the December meeting were published. Meanwhile, the data has not given a definitive steer one way or the other: growth momentum has been unequivocally weak, but the labour market has remained resilient, tightening through the back half of 2024. That leaves the situation open to interpretation. My view is that February has been live for a cut ever since the previous meeting on December 10 where the Board gave clear indications that it was moving closer to cutting (see here).
Notably, the Board threw in the towel on its hawkish narrative, removing from its decision statement the references of needing to remain 'vigilant to upside risks to inflation' and keep rates at a 'sufficiently restrictive' level. In the press conference that followed, Governor Bullock said that with key data on economic growth and wages coming in softer than expected, excess demand in the economy was slowing. This was reducing inflationary pressures and increasing confidence that a return to the 2-3% inflation target band was on track.
Since then, confirmation in the Q4 CPI report that disinflationary progress continued into year-end should have added further to the RBA's confidence. Inflation came down to 2.4% (from 2.8%) in headline terms and 3.2% (from 3.5%) on a trimmed mean or core basis, below the RBA's forecasts for 2.6% and 3.4% respectively. With the RBA to provide a forecast update today in its quarterly Statement on Monetary Policy, it is possible that the expected return to the midpoint of the target band on core inflation shifts forward from the current projection for late 2026.
Arguing against that, the labour market has outperformed the RBA's expectations, with the unemployment rate averaging 4% across the final quarter of 2024 compared to 4.3% forecast. But a tighter view of the labour market is unlikely to dissuade the RBA from cutting for two main reasons: firstly, the dual mandate of the RBA has seen the Board repeatedly say that preserving the labour market is a key priority alongside returning inflation target, and secondly, wages growth (Q4's update is due on Wednesday) has come in below the RBA's forecasts, hence Governor Bullock's comments on reduced inflationary risks.
The other key factor that should assist in justifying a cut today is that Australian economic growth at 0.8%Y/Y has been softer than the RBA's forecast trajectory. In the previous Statement published last November, the RBA assessed that the risks to the growth outlook were broadly balanced. But the soft Q3 National Accounts got the attention of the Board and played a role in its decision to soften its hawkish messaging at the December meeting. Add to that the prevailing threat of a global tit-for-tat skirmish on trade tariffs and downside risks have become more prominent.
