Economists have agreed that the Reserve Bank (RBA) will hold the cash rate at its first board meeting for 2024, after the Consumer Price Index (CPI) lifted just 0.6 per cent during the December quarter, resulting in an annual increase of 4.1 per cent.
The 0.6 per cent increase was much lower than the 1.2 per cent rise in the September 2023 quarter and represented 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.
Ahead of the RBA meeting, Commonwealth Bank of Australia (CBA) confidently remarked that it sees “no chance of any other outcome” beyond the decision to hold.
The disinflationary process has moved beyond what the RBA factored into its last forecast in November, with initial projections for core inflation for calendar year 2023 printing at 4.5 per cent.
“Economists are often judged by the accuracy of their forecasts. But some forecast misses are welcome,” CBA’s economist, Gareth Aird, said.
He believes the central bank will now lower its inflation forecast to “a little above 3 per cent” for 2024, while forecasting that inflation will return to the mid-point of the bank’s 2–3 per cent target by mid-2026.
Given that the faster pace of disinflation has been accompanied by slower economic growth and a “loosening” of the labour market beyond the RBA’s expectations, Mr Aird said: “The case to leave monetary policy on hold next week is stronger than at any point in the last two years.”
The bank believes an easing cycle will commence in September and has penned in 75 bp of rate cuts in late 2024, before a further 75 bp of easing in the first half of 2025, which would take the cash rate to 2.85 per cent by mid next year.
HSBC, too, expects the central bank to hold in February, but took a more conservative view when forecasting the end of the current cycle, noting that rate cuts are still a “distant prospect”.
“Australia’s economy is moving in the right direction for the RBA to achieve its mandated objectives – but it is getting there only gradually,” chief economist Paul Bloxham said.
“Our central case has the RBA on hold through 2024.”
The primary driver behind this view is that the bank expects inflation to trickle back towards the midpoint of the RBA’s target band, as many of the still elevated components of inflation prove to be “sticky”.
However, according to AMP’s indicators, inflation continues to point to forthcoming declines and, as such, its chief economist expects the RBA’s new forecasts to show inflation dipping below 3 per cent by June next year rather than December. By the end of 2025, AMP sees inflation at 2.5 per cent.
“The faster fall in inflation than the RBA was expecting along with soft data for retail sales and jobs since their last meeting, along with major global central banks slowly turning more dovish, is consistent with our view that the cash rate has peaked and by mid-year, the RBA will be cutting rates,” AMP’s Shane Oliver said.
However, Dr Oliver cautioned that the central bank is likely to follow its global counterparts in remaining cautious initially.
“We don’t expect rate cuts to reverse all 13 rate hikes over the last two years but by year end, we expect the RBA to have cut rates three times, taking the cash rate to 3.6 per cent,” he said.
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.
