RBA Review: Closer, but not yet

The RBA kept the cash rate on hold at 4.35% as per previewed in the November meeting when the RBA downplayed latest moderation in headline CPI, instead referred to the middle of target range and progress in underlying inflation before the chance of easing. The forward guidance statement did not change from the November statement, citing "The Board will continue to rely upon the data and the evolving assessment of risks to guide its decisions.", suggesting the RBA has not changed their view since. The RBA viewed the headline moderation of Q3 CPI to be partially attributed from the government subsidy of energy prices and stated that underlying inflation did not show the same pace of moderation. However, they also acknowledge that wage growth is slowing despite tight labor market. Combined with the weaker growth in Australian economy, the RBA should be getting ready to ease once underlying inflation shows more cooling.

The decision broadly aligns with RBA's rhetoric on data dependency and seems to be signaling they are ready to ease once headline inflation reaches 2.5% or underlying inflation (RBA trimmed mean CPI) shows more moderation. In November, RBA forecast the first round of easing will be at mid 2025. That information was not repeated in the December meeting, suggesting we may see an earlier cut than mid 2025 if data allows. The household balance sheet's restraint from mortgage cost and inflationary living pressure have been partially eased by higher wage. The labor market remains solid and will likely contribute to steady yet slower wage growth. But the pace maybe limited as the labor market has long peaked with little room to increase productivity.

Given the current inflation trajectory, the only direction of monetary policy is south. As the RBA pivot towards mid inflation target range of 2.5%, we now see the first cut to be in Q1 2025 with terminal rate at 3% by year end 2025.