RBA: Late to the 2024 Rate Cut Party
We see the RBA staying on holding in H1 2024, even if the Fed and other central banks cut interest rates. The Australian inflation picture means that the RBA has to stay higher for longer. However, with CPI eventually falling further, we do see the 1st 25bps cut from the RBA in Q3 2024.
We forecast headline CPI inflation to continue moderating throughout 2024/25 until breaking below 3% in Q3 2025. Despite dissipating supply chain disruption and global monetary tightening, inflation for 2023/24 CPI has been revised marginally higher to 5.6% and 3.4% respectively as energy prices spiked in Q3 2023. RBA has revised the inflation forecast slightly higher (Q4 2023 4.5% from 4.25% and Q4 2024 3.5% from 3.25%) but continue to expect inflation to be back to target range by year end 2025. The transitionary inflation factors have mostly dissipated yet it would take an extended period of time for sticky core inflation to rotate lower from high levels. The pace of moderation has been slower on strong domestic demand and it should pick up for household saving no long supporting such spending behavior. Moreover, there is little room for food inflation to be sustainably higher, though there may be an occasionally spike in energy prices under the shadow of geopolitical tension. The high housing cost has corrected from peak levels with mortgage rates rising significantly and housing investment has also dropped from high levels but in the recent months we are seeing a recovery in housing prices as demand outpaces supply. Wage inflation is being outpaced by inflation currently because the labor market had been at maximum capacity. The RBA is recognizing the peak in labor market and slower than forecast pace of wage inflation, which may translate to lower inflation in the medium run.
The RBA is keeping both doors open on holding and hiking rates, but as major items continue to deflate such rhetoric is almost identical to suggest a pause in tightening cycle. One cannot rule out the RBA tightening when CPI spikes like Q3 2023 but the chances are slim going forward. It is wise for the RBA to be cautious with its tightening step as not only it takes time for the cumulative effect of hiking interest rate to feed into the system, but a potential crash in the housing market from aggressive interest rate increase would create more trouble for the central bank. We now see RBA holding cash rate at 4.35% before cutting in Q3 2024 as inflation fell closer to 3% and we see the RBA moving back towards neutral policy rates of 3.0% rates by end 2025.