The Reserve Bank (RBA) will keep the cash rate on hold next week, economists have agreed.
The Consumer Price Index (CPI) lifted 0.6 per cent during the December quarter, resulting in an annual increase of 4.1 per cent, the Australian Bureau of Statistics (ABS) reported on Wednesday.
The 0.6 per cent increase was much lower than the 1.2 per cent rise in the September 2023 quarter and represents the smallest quarterly rise since the March 2021 quarter. It also surpassed expectations, with the market agreeing on a likely 0.8 per cent lift.
This result has given most economists the confidence to declare that the RBA will refrain from raising interest rates for the duration of this cycle.
In a statement made shortly after the ABS’ announcement, Westpac’s Luci Ellis said, “today’s CPI release seals the deal”.
At its previous forecast round in early November, the RBA said it was expecting both headline and trimmed mean inflation to be 4.5 per cent over calendar year 2023, implying that forecast for the December quarter was around 1 per cent in both cases.
“The detail was slightly below our expectations, and noticeably below the RBA’s,” Westpac’s chief economist said, adding that the September quarter national accounts were also weaker than the RBA expected, casting doubt on the board’s earlier assessment that domestic demand remains resilient.
But despite weaker consumer spending and proof that the upside risks predicted by the board have not come to fruition, Ms Ellis does not expect the RBA to rule out further rate increases entirely in its post-meeting communication next week.
“The case to raise rate from here is steadily losing traction,” she said.
“We expect that over coming months, further declines in inflation and soft outcomes in the real economy will give the board enough confidence that inflation will return to target on the desired timetable. They will therefore have scope to reduce some of the current restrictiveness of policy.”
Westpac continues to expect the first rate cut no earlier than September.
Commonwealth Bank took a similar view, declaring that CPI has “rubber stamped” an RBA hold next week.
“Today’s data will be viewed favourably by policymakers,” said head of Australian Economics Gareth Aird.
Noting that while the job of returning inflation to the 2–3 per cent target band is not yet done, “the RBA is now on the home straight”.
“The decision next week to leave policy on hold will be straightforward given the inflation data today has come in weaker than the RBA anticipated,” said Mr Aird.
“Monetary policy is restrictive and the arguments in favour of any further tightening are weak. We firmly believe the next move in the cash rate is down.”
In fact, the Commonwealth Bank expects rate cuts from September, before a collective 150 bps of easing by mid-2025.
ANZ, too, expects the RBA to begin cutting rates later this year, while a hold, it noted, is guaranteed in February.
“Our base case remains that the cash rate has peaked at 4.35 per cent but that cuts won’t begin until late this year,” ANZ’s senior economist, Catherine Birch, said.
“That said, risks might be starting to skew toward an earlier commencement of rate cuts. We doubt the RBA will signal this at its coming meeting, however.”
Barclays’ expectations are similar to those reported by the big banks. Namely, it sees disinflation continuing in 2024. This, it noted, will see the bank pivot to cuts by the third quarter, earlier than its previous forecast of Q4.
But despite the good news on inflation, HSBC still believes cuts are not likely in 2024.
In its response to the ABS data, chief economist Paul Bloxham said, “rate cuts may still be quite some time away” given core inflation is still above the RBA’s 2–3 per cent target band.
“Domestic inflation also still has too much positive momentum, with most of the disinflation so far coming from falling tradables prices” Mr Bloxham said, adding that domestic inflation will continue to fall “only slowly” particularly given strength in unit labour costs.
“We think the RBA will see today’s figures as good news, which will mean they do not have to hike further. At the same time, we think it is too early to be talking about rate cuts.”
Next week’s board meeting will kick-off a new timeline for the RBA under which the number of meetings will decrease from 11 to eight per year. The meeting will now take place over two days, with the policy decision set to be announced at 2:30pm on 6 February.
