RBA Preview: Favors CPI in Mid Range, No Imminent Cut

The RBA has cut the cash rate by 25bps to 4.1% in the Feb 18 meeting and will keep rate unchanged in the Apr 1 meeting as they feel no urge to cut when inflation is comfortably sitting in the mid range of target. Their previous inflation forecast revision in February is minor for the headline and 0.3% for trimmed mean, indicates they are seeing short term inflation forecast to be broadly in line. The RBA see cash rate to be at 3.6% by year end 2025 and at 3.4% June 2026 before returning to 3.5%. It is broadly align with our view for 2025 but we believe the terminal rate could be as low as 3% in 2026 for inflation could tread further lower. 

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. The latest monthly CPI is showing a moderation of 2.4% y/y, sitting comfortable around the middle of RBA's target range for second month in a row. It is likely the Q1 2025 CPI will also be circa 2.5% y/y, which is favored by the RBA. Trimmed mean, in the other hand, will be more important in the RBA's eyes. We expect the trimmed mean to stay at the upper bound of target range with gradual moderation towards mid range in Q2. 

The labor market has shown signs of softening and could see wage growth slows. The wage growth in 2024 has not been reflecting the strength of headline employment data, indicates its lack of momentum even when labor market is red hot. If we see further weakening in the labor market, wage growth could tread lower than RBA's forecast and negatively affects CPI forecast.

The current outlook for both domestic and external demand remains uncertain with potentially subdued recovery private consumption and lagged effect of monetary policy domestically. "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 from the February meeting and suggests the RBA is in no rush to bring cash rate lower soon. With data dependency being the trigger, trimmed mean CPI reaching 2.5% y/y will be key to see the next move from RBA. We see the RBA to cut by 25bps twice in Q2/3 2025 to 3.6% and bring the terminal rate to 3% before Q2 2026.