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Welcome to Bendigo Bank’s monthly market update, where we bring you the latest insights on economic trends, financial markets and what they mean for you.
This month, we’re diving into the latest inflation numbers, their impact on the RBA official cash rate, and the latest news on trade tariffs (especially their relevance here).
We’ve flagged for over a year now the view that the RBA would be cutting rates in the first half of 2025, and the 4th quarter CPI data out last week clearly supported that timing, even bringing forward the first cut from May most likely to February.
We had forecast core inflation to fall to 3.3% in Q4 while the RBA was expecting 3.4%, but in the end, was actually lower again at 3.2, with underlying inflation running at only 0.5% in the fourth quarter, all on track for the RBA target to be met this year.
The monthly indicator for December was even more benign, showing the RBA’s preferred core measure (the Trimmed Mean) ended 2024 at 2.7%, and so this faster progress has the market rating a February 18th rate cut around an 80 - 90% chance. Based on the CPI data alone the evidence is compelling, but there are a few reasons why the rate cut isn’t completely guaranteed.
Firstly, labour markets remain tight with unemployment still down at 4%, not far from 50-year lows; secondly, state and federal government spending has added to demand, as have the recent tax cuts (although business investment has been sluggish);
And thirdly, the Aussie Dollar remains under pressure falling again to fresh 5-year lows below 61 cents after President Trump confirmed that US tariffs will recommence this week; although as the chart shows, these falls have been mainly against the strong US Dollar, while our Trade Weighted Index isn’t far below its long run average. While further falls in our exchange rate appear likely, and this will have some impact on inflation, these three factors help to explain why we continue to only expect a shallow easing cycle ahead, but I doubt they will be sufficient to defer RBA rate cuts any further, so February is our favoured timing for the first cut.
Fortunately, the latest round of US tariffs aren’t being imposed on Australia (yet) and in any case, less than 5% of our exports head to the US; so the tariffs will impact Australia indirectly: especially via China. As a result, the timing and extent of any further tariffs, and the response from our trade partners including China will be important, as will further movements in exchange rates; but in general, tariffs damage the country that imposes them, leaving the US at risk of stagflation as the year progresses.
The Australian economy in 2025 will be dealing with a complex global backdrop, but if we are right that the RBA can cut rates at least 3 times to a more neutral cash rate of around 3 ½ % now that inflation has moderated, then real household disposable income should recover steadily. This should feed into private sector demand helping small businesses, although conditions remain uneven by region and industry.
And finally, house prices (and rents) were again flat to slightly lower in January, helpful for inflation, but like equity markets a reminder that asset values may struggle to beat inflation this year, even with core inflation back below 3%.
And that’s the market update from Bendigo Bank.