We continue to expect the RBA to start its rate cutting cycle with a hawkish 25bp rate cut on Tuesday. Australian trimmed mean inflation surprised the central bank 20bp to the downside coming out at 3.2% YoY in Q4. On a 6M annualised basis, trimmed mean inflation is running close to the centre of the central bank’s 2-3% target band. Household consumption appears to be picking up following income tax cuts and the introduction of the government’s cost-of-living measures, but recent retail sales have been given a boost by Black Friday and Cyber Monday sales and consumption likely remains soft.
While Australia’s labour market remains tight with an unemployment rate of 4%, the RBA will likely lower its estimate of NAIRU from 4.25% to around 4% given that wage inflation is coming off despite the stubbornly low unemployment rate. The central bank should also lower its inflation and growth forecasts to justify its rate cut. While the RBA may want to hold off for another quarterly inflation print to be more confident, inflation is coming sustainably back within its 2-3% target band, waiting until after the Q1 inflation data on 30 April would mean the central bank would be very likely be cutting rates during a Federal election.
RBA Governor Michele Bullock will manage households’ expectations, however, in her press conference and parliamentary committee hearing later this week. She will point to a likely shallow rate cutting cycle for several reasons. First, rental inflation while coming lower as immigration slows is coming off high levels. Construction of rental properties is occurring at a snail’s pace.
Second, fiscal policy will continue working against monetary policy during an election year, the ALP and opposition Liberal-National Party coalition (LNP) have already pledged over AUD10bn in additional spending; and the official election campaign has not even started. Third, trade frictions and tariffs generated by the administration of President Donald Trump will add to international inflation pressures in Australia. The US economy also remains robust and there is a growing risk of the FOMC not cutting rates any further. A strong US economy is good news for the Australian economy and will also limit RBA rate cuts. At 4.35%, the RBA’s cash rate is not far above the RBA’s central estimate of neutral of around 3.50%. With the market about 85% priced for a 25bp cut by the RBA this week, the kneejerk reaction in the AUD will be lower, but then the focus will be on Bullock’s rhetoric. We continue to look for just 75-100 bp worth of rate cuts by the RBA in 2025 and this is in line with current market pricing. Australian wages and labour market data out later in the week hold further volatility for the AUD.
While Australia’s labour market remains tight with an unemployment rate of 4%, the RBA will likely lower its estimate of NAIRU from 4.25% to around 4% given that wage inflation is coming off despite the stubbornly low unemployment rate. The central bank should also lower its inflation and growth forecasts to justify its rate cut. While the RBA may want to hold off for another quarterly inflation print to be more confident, inflation is coming sustainably back within its 2-3% target band, waiting until after the Q1 inflation data on 30 April would mean the central bank would be very likely be cutting rates during a Federal election.
RBA Governor Michele Bullock will manage households’ expectations, however, in her press conference and parliamentary committee hearing later this week. She will point to a likely shallow rate cutting cycle for several reasons. First, rental inflation while coming lower as immigration slows is coming off high levels. Construction of rental properties is occurring at a snail’s pace.
Second, fiscal policy will continue working against monetary policy during an election year, the ALP and opposition Liberal-National Party coalition (LNP) have already pledged over AUD10bn in additional spending; and the official election campaign has not even started. Third, trade frictions and tariffs generated by the administration of President Donald Trump will add to international inflation pressures in Australia. The US economy also remains robust and there is a growing risk of the FOMC not cutting rates any further. A strong US economy is good news for the Australian economy and will also limit RBA rate cuts. At 4.35%, the RBA’s cash rate is not far above the RBA’s central estimate of neutral of around 3.50%. With the market about 85% priced for a 25bp cut by the RBA this week, the kneejerk reaction in the AUD will be lower, but then the focus will be on Bullock’s rhetoric. We continue to look for just 75-100 bp worth of rate cuts by the RBA in 2025 and this is in line with current market pricing. Australian wages and labour market data out later in the week hold further volatility for the AUD.
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thedailyfx.com/performance/
3. We provide Free TradingView Premium and Essential Membership.
tradingview.com/v/yDFPnb1J/
2. Signal Performance:
thedailyfx.com/performance/
3. We provide Free TradingView Premium and Essential Membership.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.