RBA Preview: Signaling Earlier Cut

The RBA will keep the cash rate on hold at 4.35% and signals they will be cutting earlier than previous forecast in the next meeting in April as inflation is now in target range. RBA has downplayed the latest moderation in headline CPI, instead referred to the middle of target range and progress in underlying inflation before the chance of easing. The Q4 CPI continue to stay below target range at 2.4% with trimmed mean CPI at 3.2%. With preliminary data suggesting more moderation, it is likely the RBA will see the broader picture which favors an earlier cut to bring balance to the inflation/economy dynamics.

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, the continue dip in Q4 headline inflation seems to suggest there is indeed an underlying drop. The weaker growth in Australian economy combined with the slower wage growth, the RBA should be seeing the stars align for a cut. 

The labor market remains strong while wage growth has not shown its proportionate increase. It creates a certain layer of buffer for the RBA to gradually end its tightening cycle and begin cutting. The soft private consumption on the other hand, will keep RBA raising their eyebrows but not affecting their decision in interest rate yet. We believe the terminal rate for RBA will likely be around 3% and see the RBA begin their first 25bps cut in the April meeting.