While softer-than-expected data was not “sufficient” to change the central bank’s economic outlook on inflation or the labour market “materially” ahead of its December rate decision, the Reserve Bank’s latest minutes show increased confidence that inflation will return to target as forecast.
Namely, looking ahead, the RBA acknowledged that inflation risks have diminished, but warned that uncertainties remain, particularly around consumer demand and global economic conditions.
“Members judged that the risk that inflation returns to target more slowly than forecast had diminished since the previous meeting and that the downside risks to activity had strengthened,” the minutes said.
A key consideration underpinning this judgement was reduced momentum in GDP growth over the year to the September quarter, the RBA acknowledged.
“Members noted that consumption growth had been weaker than expected over this period and that it was not clear whether the apparent strengthening in consumer spending in October and November would be sustained,” the central bank said.
“Given the weakness in private demand and the slow pace of job creation in the market sector, members were alert to the risk that the unemployment rate could increase by more than expected if labour demand in the non-market sector were to slow abruptly.”
Another key factor was development in wages growth, which the central bank said had slowed “faster than expected”.
But the RBA’s concerns about inflation aren’t fully alleviated, with several factors making it too early to confidently say inflation is sustainably heading towards the target.
These include resilient economic activity, signs of stronger consumer demand highlighted by the “Black Friday” sales, and persistent global services price inflation.
The RBA also raised concerns about the level of policy restrictiveness, noting that financial conditions had loosened in recent months, potentially easing credit growth more than expected.
Moreover, it said the cash rate in Australia is still lower than or similar to interest rates in other countries, even though those countries have been cutting rates.
“Despite the reductions abroad, the combination of market pricing and central banks’ estimates of neutral interest rates implied that monetary policy might be more contractionary in several economies than in Australia and remain so into 2025,” the central bank noted.
Considering the potential impact of these observations on future monetary policy decisions, the RBA emphasised that it has little tolerance for allowing high inflation to persist for longer than currently expected.
But it also acknowledged that if the future flow of data continues to evolve in line with, or weaker than, its expectations, this would further increase its confidence that inflation was declining sustainably towards target.
“If that were to occur, members concluded that it would, in due course, be appropriate to begin relaxing the degree of monetary policy tightness. If the data came in stronger, that process could take longer. They noted that, in making this decision, they would be guided by how the evolving data shaped the economic outlook and the associated risks,” the RBA said.
Since the RBA’s last meeting, an unexpected drop in the unemployment rate sharply diminished the likelihood of an RBA rate cut in the near future, according to economists.
Namely, the data which pointed to a reduction in the unemployment rate, erased the optimism that followed the central bank’s recent rate decision.
Responding to the print at the time, CBA’s Gareth Aird said that taken at face value, the data indicates that the labour market is not loosening despite well below trend gross domestic product growth.
But Aird opined that “Australia should be able to run an unemployment rate of approximately 4 per cent and see inflation within the target band sustainably”.
As such, he said: “We stick with our call for the RBA to commence normalising the cash rate in February. But clearly that call is in doubt following the labour force report today.
“It will almost certainly require a Q4 24 trimmed mean CPI of 0.6 per cent/quarter or less for the RBA to cut the cash rate in February. And the labour market will need to show signs of loosening in December.”
Also at the time, AMP’s My Bui said the jobs print proves the labour market in Australia is still very resilient, despite an extended period of restrictive rates.
“Overall, today’s jobs figures, on their own, favour a later start to the RBA cutting cycle because a tighter labour market makes it harder for labour cost and services inflation to come down,” Bui said.
She, however, noted that soft household consumption, overall cooling inflation pressures, as well as “other cracks” in the labour market, mean that there is a “high” chance of an earlier cut in February.
“Either way, we see rates coming down to 3.6 per cent by the end of 2025.”
