While Knights Choice was a surprise winner on Cup Day at Flemington, there were no surprises 873 kilometres away at RBA headquarters in Martin Place, where Governor Michele Bullock and her board decided to keep the cash rate on hold at 4.35 per cent.
The writing had already been on the wall last Cup Day, when inflation was rising at 5.4 per cent.
This Cup Day, however, the inflation outlook is vastly different, with positive news coming from the September quarter CPI release.
We’ll delve into recent economic trends, along with commentary from the RBA, experts, and economists, as they weigh in on the future of the Australian economy and the official cash rate.
What did the RBA say at the September meeting?
The RBA's statement remained hawkish, although there were some notable changes.
In the September meeting, the RBA began its statement by saying, 'inflation remains above target and is proving persistent.'
This month, however, the rhetoric shifted slightly, reflecting changes in inflation figures over the past few months. The statement now says, 'underlying inflation remains above target and is proving too high.' The reference to inflation being 'some way above the midpoint of the two to three per cent target range' was removed.
The RBA also noted that 'headline inflation has declined substantially and will remain lower for a time.'
The statement highlighted that 'most' central banks around the world are easing monetary policy, as they become more confident that inflation is sustainably returning to their respective targets.
While these changes in the statement leaned toward optimism, the conclusion remained hawkish, reinforcing the rhetoric that the Board 'remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”
What did Michele Bullock say at the RBA press conference?
Bullock outlined all the economic figures released since the September RBA meeting (which we will explore shortly) before stating, "Right now, we believe settings are restrictive and need to remain so for the time being."
“The Board needs to be confident that inflation is moving sustainability towards the target and we need to see more progress on underlying inflation coming down.”
Bullock then took questions from journalists, with the first asking why the Board's stance remains to "not rule anything in or out." The journalist suggested that, with all the economic data moving in the right direction, wouldn't that be enough to rule out a rate hike?
“We do think that there are still some risks on the upside,” Bullock responded.
“The underlying inflation that we’re experiencing is still sitting around about five per cent for services. That’s still a significant amount of inflation in the system. What that is suggestive of is demand is still above supply which we’ve talked about before, and we still have a labour market which looks on the tightish side.”
Bullock said there are still "some things at the edges that might suggest that there might be a little upside risk," citing the stabilising of the labour market easing, such as young unemployment and average hours worked.
Asked whether she could rule out a rate cut in the first half of 2025, Bullock said she won’t be drawn into another forward guidance.
“I think at the moment we’ve got the right setting, we think monetary policy is restrictive, and that’s showing up in a number of parts of demand including private sector demand. We will assess the information as it comes through, including the forward looking indicators from our liaison and surveys and so on, and we will try to make sure that we’re tuned in enough that if things start to turn down more than expected, then we’ll be ready to act, but we don’t know.”
What did the Statement of Monetary Policy say?
The Statement of Monetary Policy (SoMP), accompanies the RBA rate announcement just four times a year. It was the SoMP released earlier this year which showed the RBA’s central case was for two rate cuts this year.
Now the November SoMP suggests the cash rate will start to decline around mid-2025, to around 3.5 per cent by the end of 2026. The majority of banks do not have this view, and, as mentioned earlier, the RBA has been wrong before (and of course, so have the banks).
“Market economists expect an earlier reduction in the cash rate than implied by market pricing, with easing beginning in the March quarter of next year,” the SoMP noted.
There were some other forecast changes, a small downward reduction to the trimmed mean inflation forecasts, a downward revision on GDP growth, and an increase in unemployment rate estimates.
The forecasts in the SoMP do not see inflation returning sustainably to target until 2026. In year-ended terms, underlying inflation has been above the midpoint of the target for 11 consecutive quarters and has fallen very little over the past year until 2026.
What is happening with inflation?
While the RBA remains firm in its stance that rates won’t be cut anytime soon, the important takeaway is that inflation is coming down.
Headline inflation fell to 2.8 per cent in the September quarter, marking the first time the annual Consumer Price Index (CPI) has been below 3 per cent — the upper limit of the RBA’s target range — since the March quarter of 2021. This is also a significant drop from the 3.8 per cent inflation recorded for the year to the June quarter.
The RBA is looking for a “sustainable” return to the target inflation range, and they’ve noted that services inflation, which includes items like rents, insurance, consumer spending, and education, remains too high.
Quarterly data typically carries more weight than the monthly update because it reflects all items in the CPI basket. The next quarterly release, for the December quarter, will be published on January 29 — just a few weeks before the February 2025 RBA rate decision.
What is happening with unemployment?
The RBA noted that a range of indicators suggests labour market conditions remain tight. While conditions have been easing gradually, some indicators have recently stabilised.
Employment grew strongly over the three months to September, with an average increase of 0.4 per cent per month. The unemployment rate was 4.1 per cent in September, up from the 3.5 per cent low in late 2022. However, the participation rate remains at record highs, vacancies are still elevated, and average hours worked have stabilised.
While strong labour markets are positive for Australians, the RBA is seeking to see labour market conditions loosen. A rise in unemployment would reduce upward pressure on wages, which in turn would help inflation move sustainably within the target range.
The RBA has forecast the unemployment rate to reach 4.3 per cent by December, before rising to 4.4 per cent by mid-2025. Similar to the path of inflation, this trajectory is moving in the right direction, with unemployment increasing from a low of 3.5 per cent in mid-2023, briefly rising to 4.2 per cent in July, before slipping back to 4.1 per cent in August and September. These latter figures poured cold water over a rate rise, which had been anticipated by many.
What are the experts saying?
Every economist surveyed in Finder.com.au’s RBA Cash Rate Survey predicted the cash rate would be held steady in November.
Dr Shane Oliver, Chief Economist and Head of Investment Strategy at AMP Capital, said inflation is falling and is likely to continue declining, which could lead to rate cuts starting in February next year.
He noted that a December cut is still possible, but that would require a sharp drop in underlying inflation in the October monthly data, along with a renewed rise in unemployment.
James Morley from the University of Sydney said the RBA would likely overlook the temporary fall in headline CPI due to energy rebates and would focus on progress in underlying inflation.
“If that progress is made in Q3 and labour market indicators start to surprise on the downside, they could start cutting rates in December. But I expect the first cut will come in February.”
Cameron Kusher from REA Group said that while headline inflation has returned to the target range, largely due to temporary cost-of-living relief, underlying inflation for the quarter is still growing too quickly to reach the target range.
“Underlying inflation hasn't printed below +0.8% since June 2021, so I can't see a situation where this data would materially change the outlook for interest rates."
What is happening to house prices?
PropTrack’s Home Price Index indicated national home prices hit a fresh record in October.
“Home price growth has persisted despite the higher interest rate environment,” Eleanor Creagh, REA Group Senior Economist said.
“Prices have now cycled through 22 consecutive months of growth, although performance differs significantly around the country.
“The pace of home-price growth remains slower than earlier in the year as buyers enjoy more choice and high interest rates and affordability constraints remain. While a higher number of properties listed for sale and uncertainty around rate cuts may slow price growth, prices are expected to keep rising as the selling season closes out.”
CoreLogic’s national Home Value Index (HVI) recorded a 0.3 per cent rise in October, with their figures showing 21 months of growth since the cycle commenced in February last year.
Tim Lawless, head of research at CoreLogic, says at the very least, the decision to hold interest rates at 4.35% should provide a further boost to household confidence, along with clear signs that inflation is moving in the right direction and the next move is likely to be down, albeit with some uncertainty around the timing of cuts.
“For housing markets, a rate cut would clearly be a net positive. Lower interest rates imply inflation has been tamed, with both factors supporting a boost in consumer sentiment (which has already been trending higher from a low base). Higher sentiment and housing activity have historically shown a strong correlation,” Lawless said.
“Lower interest rates will also provide a boost to borrowing capacity which should support better access to housing, however affordability challenges which are broad-based across the Australian housing market are likely to persist, keeping a lid on any material rebound in home sales.”
When will interest rates come down?
The Commonwealth Bank of Australia (CBA) was the last major bank to concede that a rate cut in 2024 is unlikely. Initially steadfast in forecasting a December cut, CBA revised its forecast to align with ANZ, Westpac, and NAB. NAB had been the most pessimistic, forecasting the first rate cut in May, but revised its outlook at the end of September.
CBA’s base case now assumes the RBA will begin normalising the cash rate in February 2025, with a 25 basis point cut.
“Given that we see little chance of a December 2024 rate reduction, the risk to our call lies with a later start to the easing cycle,” said CBA’s Head of Australian Economics, Gareth Aird. He added that the RBA will likely be more willing to leave policy on hold for an extended period if the unemployment rate does not rise much further.
CBA expects four rate cuts over 2025, bringing the cash rate to 3.35 per cent by year-end.
“This is slightly below the RBA’s estimate of the nominal neutral cash rate, which is centred on a point estimate of 3.5 per cent,” Aird said.
Westpac is forecasting the same number of cuts within the same timeframe. ANZ expects one fewer cut, predicting three in total, which would take the cash rate to 3.6 per cent by December 2025.
NAB, on the other hand, anticipates a longer cutting cycle and forecasts that the cash rate will fall to 3.1 per cent by June 2026.
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