LUCI’S CALL: Inflation outlook keeps Feb rate cut in play

The Reserve Bank of Australia left the cash rate on hold at 4.35 per cent at its November Board meeting, as widely expected. 

While price pressures are easing broadly in line with the RBA’s expectations, the Board remains concerned that underlying inflation is still well above the 2-3 per cent target range and declining only gradually. 

That said, the RBA did nudge lower its forecasts for inflation, seeing it falling sustainably to the mid-point of the target band by the end of 2026, and adjusted its outlook for wages growth down slightly. 

It also revised down its view of consumption and highlighted downside risks in the near term, with Stage 3 tax cuts so far not having boosted spending as much as was previously assumed. This is the same message we’ve been seeing in our banking data. 

On the other hand, the RBA remains wary about the strength of the labour market, noting that employment grew strongly in the September quarter. They are also worried about weak productivity growth potentially not picking up, while highlighting that other jobs-related indicators – including business surveys and average hours worked – have stabilised. 

The RBA was also keen to emphasise that the labour market here is a bit stronger than in other countries. 

This shouldn’t be surprising given that Australia was later to see inflation pick up and peak, having been later to open up after the pandemic than a number of these peers. Now that those other countries are seeing a more advanced disinflationary trend, it makes sense that they’re also seeing the labour market come off sooner.  

Holding onto more of the labour market gains was also the RBA’s deliberate strategy and the reason why it chose the ‘not quite as high for a bit longer’ approach on interest rates in the first place – an objective that the Governor again highlighted in the media conference after this week’s announcement.

While there were some elements of the RBA’s rates decision, statement and new forecasts that were more hawkish than our own view of the data, there wasn’t anything to cause us to shift our view about the outlook for the cash rate. 

The RBA’s December Board meeting is likely to come too soon for a rate cut, but by February we think the RBA will have seen enough to be confident that inflation is declining and will be sustainably in the target band on the trajectory that it is currently forecasting. 

To read Luci’s full note, visit WestpacIQ.