The RBA stayed on the sidelines and left the cash rate unchanged at 3.60%, after easing policy last month. The decision came as no surprise. Instead, the focus was on what clues can be gleaned for future meetings, especially the November board meeting, after recent data suggested November is a close call. Indeed, less than a fortnight ago, financial markets were fully priced for a rate cut in November. Now, a probability of only 30% is attached to a move in November.
Our view has been that the RBA will cut two more times in this cycle. It has so far cut a total of 75 basis points, which is modest relative to past easing cycles and only partly unwinds the thirteen rate hikes it delivered post-COVID. We remain comfortable with two more cuts and a terminal cash rate of 3.10%. In fact, the Governor today confirmed that policy is “still probably a little restrictive”, which means there is room for more easing. The question, as is often the case, is one of timing. The RBA Governor has emphasised repeatedly that they remain data-dependent and will make decisions meeting by meeting. The easing cycle is likely to remain gradual.
After the statement and press conference, we are less confident in our November call. There’s a real risk the RBA holds in November and delays cutting until December or February. The RBA said that it sees risks as “broadly balanced”, noted the “decline in underlying inflation has slowed” and pointed out the upside surprise in the recent activity and inflation data. This suggests the RBA will retain their cautious-cutting nature and decisions will continue to be made meeting by meeting.
The RBA can afford to stick with this approach because underlying inflation is in the target band, unemployment is low and private demand, led by household spending, is recovering. Further, the recent rate cuts have not yet fully transmitted to the economy because monetary policy operates with long and variable lags.
In our opinion, there is more easing ahead, although not much more and timing remains highly uncertain. Much will depend on developments in the labour market and inflation trends, with the next data releases on both due later this month.
On the labour market, we continue to expect jobs growth to soften and the unemployment rate to tick higher, partly based on feedback from our liaison with recruitment businesses. On quarterly inflation, our expectation is the annual rate will print at 2.7% in underlying terms but the monthly series suggests upside risks to this result. A result higher than 2.7% would likely lead to the RBA staying on the bench for longer.
The RBA appears to have a love-hate relationship with the monthly inflation gauge. In the past, it has been more dismissive of this monthly measure, for example at the July meeting. Today, it seemed to give the monthly measure more weight. It acknowledged the measure was volatile and noisy, but also said the components provide useful information and that some components, particularly market services and housing, indicated a bit more upward pricing pressure.
Markets are now not fully pricing in a rate cut before March 2026. The market is highlighting the risks that this easing cycle may be dragged out and ever so gradual. The data will be telling!
The information in this article is general in nature, intended for informational purposes only and does not constitute financial, investment, legal or professional advice; readers should seek guidance from qualified professionals before making decisions based on its content.
