Inflation is at RBA’s target: Should we expect a Cup Day rate drop?

On 30 October, the Consumer Price Index (CPI) results were released by the Australian Bureau of Statistics. This saw annual inflation drop to 2.8 per cent from 3.8 per cent the previous quarter.

This marks the first time that annual inflation has been within the Reserve Bank of Australia’s (RBA) long-sought-after target band of 2–3 per cent since the March 2021 quarter, which has been the primary objective of the central bank since it began its monetary policy tightening cycle in May 2022.

Now, just around the corner (5 November) is the Melbourne Cup cash rate call. With inflation finally subsiding, could we expect to see rate cuts? The experts don’t think so as many are pencilling February 2025 as the time to expect a drop.

Matthew De Pasquale, economist at Judo Bank:

“I can tell you now that the RBA will likely remain on hold next week. The result for September is in line with the RBA’s most recent SoMP forecast figures, so despite resilience in labour market figures, we don’t anticipate they will be pushed into a hike next week,” he said.

“At the same time, the very significant impact of subsidies on today’s release (we estimate around 50bps on the headline quarterly inflation reading) and the ongoing stickiness of services inflation, ticking up from 4.5 to 4.6 per cent annually, means today’s data is unlikely to provide the RBA with the confidence that inflation is ‘sustainably’ moving to the 2–3 per cent target range. Hence, no cuts are anticipated in the near term.”

Gareth Aird, head of Australian economics at CBA, and Stephen Wu, senior economist at CBA:

“The September quarter 2024 CPI indicated that the disinflation process has continued. But not quite at the pace we anticipated on an underlying basis. The upshot is that we no longer expect the RBA to cut the cash rate in December 2024. Instead, we pencil in February 2025 for a 25bp rate decrease,” they said.

“This shift should not come as a surprise. Regular readers will note that last week we stated that our call for the RBA to commence normalising the cash rate in December was conditional on a Q3 24 CPI trimmed mean outcome of 0.7 per cent/qtr or less. And an outcome higher than our forecast would see us jettison our call for a rate cut this calendar year.

“Overall, the data today was broadly in line with market expectations. The September quarter 2024 CPI was below market expectations on the headline measure. But the more policy-relevant trimmed mean CPI was in line with the market median forecast. Underlying inflation is essentially tracking in line with the RBA’s forecast from the August Statement on Monetary Policy (SoMP). As such, we expect the Board will leave the cash rate on hold next week.”

Callam Pickering, Indeed’s APAC economist:

“Australia’s inflation problems continue to be homegrown and recent government policies may help create the illusion that the problem is solved, but that’s far from the truth. There is still some way to go before the RBA could be reasonably confident that underlying inflation will a) return to its 2–3 per cent inflation target, and more importantly b) stay there,” he said.

“It’s difficult to see the RBA cutting rates when service sector inflation is still so high, productivity growth so poor and the Australian labour market so tight. The market and many market economists believe that rates will be cut within the next six months, perhaps as early as February, but it still seems like we need to see a few boxes ticked before that happens.

“Our view is that the trigger for a rate cut – or even a rate hike for that matter – will be a significant deviation from forecast for the major economic measures, such as the unemployment rate or inflation. The jobs market is tracking a little better than expected, while underlying inflation seems broadly as expected. The next couple of monthly inflation reports will likely be pivotal in shaping market expectations and the next move from the RBA.”

Luci Ellis, Westpac’s chief economist:

“Following today’s inflation data for the September quarter, we affirm our call for the Reserve Bank Board to leave the cash rate unchanged at its meeting next week. We continue to expect rates to remain unchanged this year, and that the rate-cutting phase will begin with a 25-point cut at the February 2025 meeting,” she said.

“Headline inflation dropped into the target range and the outcome was marginally below consensus. Trimmed mean inflation also declined and was in line with consensus and, we believe, what the RBA was expecting. With the disinflation on track, the possibility of a rate hike fades further, and Australia moves closer to the start of the rate-cutting phase of monetary policy. We also note that concerns about domestic supply constraints would have eased given the recently released revisions to productivity and other national accounts data.”

Catherine Birch, senior economist at ANZ:

“We do not think the decline in trimmed mean inflation will be enough to convince the RBA it should begin the easing cycle this year, particularly as there does not appear to be an urgent need to support the labour market, given its resilience over recent months,” she said.

“We maintain our call for the RBA to hold the cash rate at 4.35 per cent until a 25bp cut in February 2025, with underlying inflation expected to ease a little further in Q4 2024. Should inflation not ease as we expect and/or the labour market and activity data show more resilience, easing could be delayed.”

Chris Ford, general manager – media and communications at Compare the Market:

“With CPI now in the RBA’s target range, the chances of a rate cut are a bit more favourable, but it’s more likely the board will wait to see a sustained trend,” he said.

“The Board will be wary of cutting the cash rate too early, as the Christmas period can be a period of higher spend. People are going on holidays, travelling to see their families, and buying presents in the sales. Families might be spending more on boredom buster activities or vacation care.”

Sunny Nguyen, economist at Moody’s Analytics:

“The most important question is whether the positive development on the inflation front will see the RBA change course. We consider it unlikely. We don’t expect rate cuts any time soon. The bank expects inflation to climb above the target range when government support, responsible for the downwind in headline inflation, expires,” she said.

“The bank will likely play it safe and wait for clear signs that core inflation is under control before considering any rate reductions. The RBA also hiked less aggressively than its peers, so it has less room to cut, and all the key indicators still point to a soft landing with a robust labour market.

“Plus, federal government tax cuts effectively provide taxpayers with financial relief. This takes pressure off the bank to follow global trends and cut now. As the key indicator will be the December quarter inflation print, which won’t be available until the end of January, the February monetary policy meeting is the earliest the board might lower rates.”

Considering the last rate hike was on Cup Day 2023, there is a lot of weight sitting on this decision. Despite this, if the experts are anything to go by, consumers should expect things to remain unchanged for now.

[Related: Back in the band – inflation hits RBA’s target]

Jack Campbell is the editor of Broker Daily. After graduating from the University of Wollongong in 2022, Jack began his journalistic career working on Broker Daily’s sister brand, HR Leader. In August 2023 he was made the news editor and worked alongside some talented journalists writing articles and recording podcasts.

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