Dr Shane Oliver, Head of Investment Strategy & Chief Economist at AMP, discusses the RBA's decision.
At its November meeting the RBA left the cash rate on hold at 4.35% as widely expected, leaving it unchanged for 12 months now.
The RBA’s rates guidance is now neutral. It continues to note that underlying inflation is still too high, and the labour market remains tight, but its statement and Governor Bullock’s comments were less hawkish and broadly neutral consistent with slightly lower underlying inflation forecasts and greater confidence that inflation is heading down towards target again. In particular, Governor Bullock again noted that the RBA did not consider another rate hike and she declined to reiterate that “in the near term [the Board] does not see interest rate cuts” and replaced it with more neutral guidance around assessing new information as it comes in.
Our base case remains for the first cut in February next year. A rate cut is still possible in December if October trimmed mean inflation shows a sharp fall and unemployment rises sharply, but the RBA would still probably prefer to wait for confirmation of the downtrend in underlying inflation in December quarter inflation data due at the end of January. On the other hand, we doubt that the RBA will have to wait all the way out to May to be confident enough on inflation to start cutting.
The RBA holds rates at 4.35% and its guidance is now neutral
In leaving rates on hold the RBA noted that high rates have been working to rebalance demand and supply, inflation has fallen substantially from its 2022 peak, growth has been weak and there are uncertainties regarding the outlook for spending and the global outlook. However, it also noted that underlying inflation is still too high, and services inflation remains sticky, it still does not see underlying inflation returning to the mid-point of the target until 2026, that demand remains in excess of supply in the economy, labour productivity is still only at 2016 levels and the labour market remains tight.
However, the RBA revised down slightly its growth forecasts, partly reflecting a slower pick up in consumer spending and it revised up slightly its 2025-26 unemployment forecasts.
It revised down its near-term headline CPI forecasts, but still sees it pushing back up again next year, if currently legislated “cost of living” measures are not continued.
More significantly though it now sees a slightly lower forecast profile for trimmed mean inflation, although it still doesn’t see it being back to around target until end 2026.
The downwards revisions to underlying inflation basically took the RBA’s forecasts back to where they were in May.
Source: RBA, AMP
The RBA’s rates guidance is now neutral. The RBA reiterated that its “not ruling anything in or out”, Governor Bullock again noted that the RBA did not consider another rate hike and she declined to reiterate that “in the near term [the Board] does not see interest rate cuts” and replaced it with more neutral guidance around assessing new information as it comes in and thinking about what it needs to see to move in either direction on rates.
The RBA reiterated that “policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range”, which implies they are still waiting for that confidence but also allows a bit of leeway in terms of when the RBA will first start cutting. In other words, the RBA, like other central banks, won’t need to wait until underlying 12 month ended inflation is in the target range before starting to cut. This is similar to other central banks.
Overall, we are not there year but do appear to be getting closer to a rate cut.
Our view remains that the first rate cut will come in February
There are seven reasons why a rate cut is getting closer: monetary policy remains restrictive; the full impact of past rate hikes is still feeding through; recession risks remain significant as indicated by the ongoing slump in real household spending per capita; slowing population growth will add to the risk of weaker economic activity ahead; forward looking jobs indicators warn of a significant further rise in unemployment; wages growth has peaked which will slow underlying services inflation; and just as global inflation and interest rates led Australian interest rates up starting in 2021-22 they are now pointing down for Australian interest rates, albeit with a lag.
While some point out the RBA’s cash rate has not increased as much as in other countries that are now cutting, the actual mortgage rates being paid have generally increased by more in Australia than elsewhere given our heavier reliance on variable and short dated fixed mortgages. What’s more underlying inflation (at 3.2%yoy in September) and unemployment (at 4.1%) is very similar to that in the US and the UK.
Source: Bloomberg, AMP
Consistent with this our Australian Pipeline Inflation Indicator points to a further fall in inflationary pressures ahead – and our Indicator does not take account of government “cost of living” relief!
Source: Bloomberg, AMP
Our base case remains that the RBA will start cutting rates in February as it will want to see another quarter of lower underlying inflation before having enough confidence “that inflation is moving sustainably towards the target”. This means waiting for the December quarter inflation data which won’t come out till late January. That said we are heading in the right direction. A December rate cut is still possible, but it would require October monthly inflation data due late this month to show a further drop in trimmed mean inflation to less than 3%yoy and for unemployment to have another leg up. On the other hand, we doubt that the RBA will have to wait all the way out to May to be confident enough on inflation to start cutting.
Ends
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