RBA Review: It has begun

The RBA has cut the cash rate by 25bps to 4.1% in the Feb 18 meeting, seeing rates remain restrictive after the cut and signals data dependency going forwards. RBA has also revised inflation forecast for the first half of 2025 lower to 2.4% y/y from 2.5%, trimmed mean at 2.7% from 3% but revised 2026/27 headline inflation higher. They see cash rate to be at 3.6% by year end 2025 and at 3.4% June 2026 before returning to 3.5%, a terminal rate so far. The key change of stance from RBA came from softer than expected inflation and GDP growth.

The RBA acknowledged the cooling of Q4 trimmed mean CPI to be a trigger as it approaches target range of 3% at 3.2% y/y. Headline inflation's cooling has been so far downplayed/ignored as it does not fit their rhetoric unless they are aggressively easing. Moreover, they see lower wage pressure and sluggish growth in private demand despite surprisingly strong labor market. It seems to suggest it will be a gradual easing path the RBA to be on, instead of the aggressive cutting from the RBNZ. The market is reading the cut as a hawkish one, as it does not suggest an urgency in further easing.

The current outlook for both domestic and external demand remains uncertain with potentially subdued recovery private consumption and lagged effect of monetary policy domestically while geopolitical and policy uncertainty externally also clouds the outlook. "The Board’s assessment is that monetary policy has been restrictive and will remain so after this reduction in the cash rate." is a key statement for market participants to read this cut as a hawkish cut. The forward guidance of "The Board will continue to rely upon the data and the evolving assessment of risks to guide its decisions." suggests the RBA will react on data to ease in the coming months.