The Reserve Bank of Australia (RBA) cut the cash rate by 25bps at today's meeting to 4.1% (and the ES rate to 4.0%), a move the Board said dials back some policy restriction in acknowledgment of the progress achieved on inflation. But hawkish elements have returned to the statement highlighting inflation risks, while Governor Bullock pushed back on market pricing that, going into the meeting, had the cash rate declining to 3.6% by year-end.
My analysis provided to Macro View readers since the RBA's final meeting for 2024 on December 10 had focused on February being live for a cut. Increased confidence in inflation retuning to the 2-3% target band was a clear signal from the Board that a cut was on its radar early in the new year. As outlined in my preview of today's meeting, the encouraging Q4 CPI report in late January would have added sufficiently to that confidence to get a cut across the line today - despite ongoing strength in the labour market. That is broadly how the decision played out.
With inflation declining to 2.4%Y/Y in headline terms and 3.2%Y/Y trimmed mean in Q4 - disinflationary progress slightly faster than the RBA had forecast - the Board made its move today. The messaging in the decision statement and from Governor Bullock in the post-meeting press conference was that the 25bps cut removes some policy tightness - framed as reversing the final hike of the tightening cycle from November 2023 - but still leaves the cash rate at a restrictive setting. From here the RBA will move cautiously, with the outlook for growth domestically and offshore clouded by uncertainty.
Governor Bullock highlighted the risk that disinflation could stall and leave inflation above the midpoint of the target if rates are eased too aggressively - a clear shot across the bow for markets pricing in an easing cycle lowering the cash rate to 3.6%. The February Statement on Monetary Policy (SoMP) lowered the inflation outlook to mid-2025 on the back of the Q4 CPI report: headline easing to 2.4% (from 2.5%) and trimmed mean to 2.7% (from 3.0%); however, under the assumption that the cash rate is cut to 3.6% in line with market pricing by year-end, the inflation forecasts by the end of 2026 have moved higher to be above the midpoint of the target band: headline up from 2.5% to 2.8% and trimmed mean up from 2.5% to 2.7%.
Also playing a role in the uptick in the inflation forecasts by end-2026 is that the RBA now has a tighter outlook for the labour market going forward. Forecasts for the unemployment rate have fallen from 4.5% to 4.2% for both 2025 and 2026. That reflects the unexpected strength the labour market has shown relative to the RBA's earlier forecasts. But the key for policy decisions will be how the prevailing labour market conditions influence inflation. The RBA notes throughout the SoMP that it is unsure how tight the labour market currently is and it is highly uncertain how the demand-supply balance, which will influence inflation pressures, will evolve over time.
