RBA Review: Waiting to ease

The RBA kept the cash rate on hold at 4.35% as we forecast despite headline CPI heading closer to the upper band of target range. The forward guidance statement remained the same in the September 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. The preliminary growth of Australia in the second half seems to have eased RBA's mind that the long period of restrictive rates would hurt the Australian economy significantly. The growth in wage has spurred consumption growth for local residents while international students and tourist spending is steadily strong. Such balanced dynamic, even with certain outlook uncertainty, has provided the RBA with less pressure to ease. 

The decision broadly aligns with RBA's rhetoric on data dependency and the cumulative impact of tightening. Yet, the RBA has subtly referred to the mid point of target range and underlying inflation (RBA trimmed mean CPI), instead of headline CPI and target range in their statement, seems to preview that the headline inflation will likely continue to moderate in the coming quarters. And to avoid sending the wrong signal to market participants and subsequently forcing their hand, the RBA now seems to have tilted towards underlying inflation sustainably reaching the middle point of target range at 2.5% before easing when the RBA forecast to be at mid 2025. 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 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.