RBA delivers rate decision on Melbourne Cup Day

The Reserve Bank of Australia (RBA) has announced another rate hold after the September consumer price index (CPI) data reinforced the need to remain vigilant to upside risks to inflation.

The RBA left the cash rate unchanged at 4.35 per cent for the eighth consecutive time.

The market was more or less unanimous on the RBA holding the cash rate.

At the post-meeting media conference, Reserve Bank governor Michele Bullock addressed market expectations for a gradual easing of policy starting around mid-2025. She noted that while this isn’t the bank’s official forecast, it aligns closely with the bank’s outlook, asserting that the market is “reasonably on message”.

“We are not, at the moment, in a position where we can sustainably say inflation is going to be back in the [target] band, and we want to be more convinced of that,” Bullock said.

“I think what the market is reflecting is that they understand that point of view, and the risks are balanced.”

Contrary to expectations voiced by economists this week, Bullock reiterated that the RBA is “not ruling anything in or out” as risks to the upside still exist.

“The underlying inflation that we are experiencing is still sitting at around about 5 per cent for services, that’s still a significant amount of inflation in the system and what that is suggestive of is that demand is still above supply. And we still have a labour market which looks on the tightish side,” the RBA governor said.

“There are some signs that the easing in labour market may have stabilised a bit.”

Avoiding giving firm forward guidance, Bullock explained that the RBA currently views monetary policy as restrictive and aims to keep it aligned with economic conditions.

“If things start to turn down more than expected, we’re ready to act, but we don’t know," she said.

The governor emphasised that weaker-than-expected consumption data or private sector demand could prompt the central bank to consider an interest rate cut.

“For example, [if] consumption comes in much weaker than expected and the private demand side of the economy is coming in much slower than expected, that might be something that is worth looking at and thinking whether or not that is going to feed through to inflation and does that have implications for the cash rate path,” she said.

Currently, according to market pricing, the cash rate is assumed to begin to decline around mid-2025, and to decline to around 3.5 per cent by the end of 2026.

Unwilling to elaborate on whether the easing cycle is likely to be shallow, Bullock said: “The interest rates that we saw through COVID, unless we’re back in another disastrous situation, that is not normal.”

Describing the COVID-19 lows as “emergency lows”, she said rates are “not going back to where they were”.

The RBA’s last rate hike occurred in November last year, marking its 13th since it commenced its tightening cycle in May 2022.

Since then, trimmed mean inflation has eased from 5.1 per cent year-on-year to 3.5 per cent, and while it does align with the RBA’s forecast from August, it is believed to have placed the central bank on a cautious stance on rate cuts.

Last month’s CPI print shifted the outlook for interest rate cuts into 2025, highlighting ongoing concerns over core inflation that remained stubbornly above the Reserve Bank’s target.

Namely, while the latest consumer price index print had seen inflation drop to 2.8 per cent over the past 12 months to September, core inflation remained above the Reserve Bank target.

At the time, Gareth Aird from the Commonwealth Bank of Australia acknowledged that while the September quarter CPI indicated continued disinflation, it had not progressed at the pace 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 25 bp rate decrease,” Aird said at the time.

Commenting on the RBA’s Melbourne Cup Day announcement, AMP’s Shane Oliver noted that while the statement is “less hawkish”, this shift is mainly due to slight downward revisions to underlying inflation and growth, alongside a modest upward revision to unemployment.

“But with the RBA still seeing inflation as too high and the labour market as tight, it’s not in a rush to cut. Overall, I would characterise the RBA as balanced,” Oliver said.

A February start to rate cuts remains AMP’s base case, the chief economist confirmed.

“A cut in December is possible but would require a sharp fall in October monthly underlying inflation and another step up in unemployment but the RBA will most likely wait till February,” he said.

Krishna Bhimavarapu, APAC economist at State Street Global Advisors, noted that while there was no unexpected dovish shift in Tuesday’s announcement, the RBA’s November SMP made multiple references to cash rate easing beginning only from “mid-2025”, compared to none in August.

“We worry if the takeaway is that the RBA is prepared to maintain restrictive policy for longer, which may lead to a downside surprise in growth,” Bhimavarapu said.

“However, it is important to recognise that the trimmed mean inflation is likely to ease more and into the target range sooner than expected but still, we see rates remaining restrictive for an extended period now.”

According to Oxford Economics, the RBA is playing a patient game of waiting for output to come back to the economy’s potential.

“This means the recent run of very weak growth is likely to continue, notwithstanding the nascent signs of a pick-up in consumption growth. We still expect to see the first rate cut in Q2 of 2025, but the balance of risks around this are shifting toward the first easing coming later, rather than sooner,” Oxford Economics said.