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Following the Reserve Bank of Australia (RBA) holding the cash rate at 4.35 per cent for the eighth consecutive meeting, bank economists continue to price in the beginning of the easing cycle to begin in February 2025.
As has been the case for some time now, the RBA’s and governor Michele Bullock’s reasoning given for the extended pause was that underlying and trimmed mean inflation still remains too high for the board to be confident enough to begin lowering interest rates.
Adam Boyton, ANZ’s head of Australian economics, stated the RBA had “retained a mild hawkish tone” in the post-meeting statement; however, noted that the accompanying Statement on Monetary Policy (SMP) has lowered the trimmed mean inflation, GDP growth and wage price index forecasts while increasing the unemployment rate estimates.
“While most of these are small changes, the forecasts do appear to have evolved in a more neutral direction than the rhetoric.
“ANZ Research’s views remain unchanged by today’s decision, post-meeting statement and SMP. We expect the first cut will begin February 2025, with the cash rate to end that year at 3.60 per cent, marking the low for the cycle.
“At the risk of stating the obvious, [yesterday’s] RBA decision and communication is not the major event risk for markets or the broader global economic outlook this week,” Boyton said.
Head of Australian economics at the Commonwealth Bank of Australia (CBA), Gareth Aird said their base case is still for the RBA to be on hold until the February 2025 board meeting, however, the “risk clearly sits with a later start date for the first interest rate decrease”.
“The path of the cash rate underpinning the RBA’s forecasts is assumed to begin to decline around mid-2025, and to be ~3.5 per cent by the end of 2026. This is a little higher than the assumption underpinning the forecasts in August. The impact, however, on the overall updated forecasts is trivial,” he said.
Westpac chief economist Luci Ellis noted that while “some elements” of the RBA’s economic analysis “seems a little hawkish” compared to the bank’s own view of the data, they also view February to be the beginning of the easing cycle, but “no earlier than that”.
“In the press conference, the governor declined to give any guidance on the outlook for the cash rate for the first half of 2025,” Ellis said.
“This contrasts with the language in August, where a near-term cut was ruled out. We suspect that the RBA believes that it will not start cutting until later in 2025, but this view could evolve if inflation continues to come in consistent with or below current forecasts.”
Shane Oliver, chief economist and head of investment strategy at AMP, stated that a “December rate cut is still possible” but the October monthly inflation figures would have to show “a further drop in trimmed mean inflation to less than 3 per cent yoy and for unemployment to have another leg up”.
“On the other hand, we doubt that the RBA will have to wait all the way out to May to be confident enough on inflation to start cutting.
“Our base case remains that the RBA will start cutting rates in February as it will want to see another quarter of lower underlying inflation before having enough confidence ‘that inflation is moving sustainably towards the target’.
“This means waiting for the December quarter inflation data which won’t come out till late January. That said, we are heading in the right direction,” Oliver said.
Meanwhile, Judo Bank economist Matthew De Pasquale stated that with the RBA “still vigilant to upside risks and a shallow easing cycle anticipated abroad”, they expect a hold until November 2025.
“The consensus among economists is for the RBA to commence cutting in February, while money markets have moved significantly over the past six weeks, with the first anticipated cut priced in moving from December 2024 to May 2025,” De Pasquale said.
Additionally, Warren Hogan, chief economic adviser at Judo Bank, said the RBA is prepared to remain patient, but if they are “pushed into action in the next six months”, a rate hike rather than a rate cut is expected.
“Several assumptions underpin the return of inflation to target, including a drop in wage growth and a pick-up in productivity growth. There continues to be a lot of uncertainty around both of these assumptions.
“Our central case assumes the RBA cash rate will not change in the next year, which aligns with the latest communications from the RBA today. The next RBA board meeting is in six weeks, the last until February 2025, a very long 10-week wait,” Hogan said.
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