With the Reserve Bank of Australia (RBA) due to release its statement on monetary policy this afternoon, Westpac chief economist Luci Ellis said that there are several areas to monitor.
Following last week’s September quarter inflation data, Westpac has reiterated its expectation that the central bank will keep the cash rate steady at Tuesday’s meeting, with the first rate cut of 25 basis points anticipated in February 2025.
However, Ellis said the bank will be keeping tabs on whether the RBA maintains its “not ruling anything in or out” language, with previous meetings indicating that several outcomes are still on the cards.
“The further down the disinflation path we travel and the longer the disinflation remains on track, the harder this language is to justify, even with broader financial conditions supposedly easing,” Ellis explained.
According to the chief economist, the RBA must soon acknowledge that Australia is nearing the point where interest rates can start to fall.
“Perhaps downwardly revised inflation forecasts at this meeting will be the trigger, or the decline in wages growth that will be released ahead of the next meeting,” she said.
Moreover, Ellis emphasised that the central bank is “looking through” rebate-driven distortions in headline consumer price index (CPI) to focus on trimmed mean inflation – but questioned whether the RBA will shift its focus if headline inflation surpasses 3 per cent in late 2025.
“When the tables turn in late 2025 and headline is printing above 3 per cent while trimmed mean declines below 3 per cent, will the RBA continue to focus on trimmed mean, or start calling out the deviation from target on a headline basis?”
In a recent episode of Relative Return Unplugged, GSFM market strategist Stephen Miller opined that the RBA will maintain its focus on the trimmed mean inflation, which came in at 0.8 per cent for 3Q24 and 3.5 per cent year-on-year.
“The headline number is indeed a bit better than expected, but for the RBA, the trimmed mean measure is more critical. It came in at 0.8 per cent quarter-on-quarter, or 3.5 per cent annually, which aligns with the RBA’s forecast from August. This doesn’t significantly alter the market’s expectations regarding potential rate cuts,” he told InvestorDaily.
Miller, who also anticipates rate cuts to potentially kick off in February 2025, said that headline CPI data remains somewhat artificial as factors like energy rebates and low fuel costs, which brought the figure down to 2.8 per cent in the 12 months to September, provide only temporary relief.
“The trimmed mean measure attempts to exclude such influences, offering a clearer picture of the underlying inflation trend. While the trend is declining, from 3.8 per cent in June to 3.5 per cent now, the RBA expects the headline rate to rise as subsidies are phased out,” he said.
Meanwhile, CBA economist Gareth Aird said that the big four bank expects the statement accompanying the RBA’s rate decision to retain a “neutral bias”.
“But some softening in the language around the persistence of inflation is more likely than not given the recent inflation outcomes,” Aird warned.
Namely, the central bank’s September statement accompanying the board decision noted: “Data since then [i.e. since the August forecasts] have reinforced the need to remain vigilant to upside risks to inflation and the board is not ruling anything in or out.”
Aird believes that this stance may be “watered down” come Tuesday afternoon, coupled with a more neutral slant.
“The Q3 24 inflation data meant that upside risks to the RBA’s inflation profile did not materialise over the September quarter. And that will give the board greater confidence that another rate increase in this cycle will neither be warranted or delivered,” he said.
However, the economist conceded that the Reserve Bank’s communication strategy has historically erred on the side of caution.
“The board appears to be fond of the line that it is ‘not ruling anything in or out’ as it does not paint them into a corner,” Aird said, echoing Ellis, and affirming that Australia is approaching the point at which the board should feel confident that the next move in rates will be down.
“Put another way, the RBA’s communication should start to reflect the balance of risks to the monetary policy outlook.”
The CBA, which earlier predicted rate cuts for 2024, has since the September CPI data pushed their forecast out to February.
