A tumultuous week for global markets and geopolitics as the US election has come to a head, but a very predictable outcome from the RBA in their November policy meeting. Our latest forecasts and views, as 2025 approaches fast.
The Reserve Bank predictably stayed on script, with the cash rate remaining at 4.35%, its likely cycle peak for a year now, and no real prospect of a cut in December either.
Michele Bullock again made it clear that while progress with moderating inflation is continuing, the RBA still don’t expect underlying inflation to sustainably reach their target until 2026. A range of factors remain in play for this timing, and by their own admission the RBA see these factors as uniquely uneven and unpredictable, meaning they don’t have confidence to start easing rates and will need plenty of fresh evidence before doing so.
As a result, the market yield curve is now fully pricing an RBA rate cut by May ‘25, but with only around a 40% probability by February, which matches our unchanged view that May is more likely, but also is a reminder that the easing cycle is still on track, especially after the latest inflation numbers.
The Consumer Price Index is down to 2.8% year-on-year based on the third quarter data, but core inflation, which doesn’t benefit from energy rebates and other cost of living measures, is still up at 3.5% well above the 2-3 % target band, which explains why the RBA can’t reduce rates just yet.
But we should be there by mid-next year, and the latest monthly data actually showed even faster progress, with CPI down to 2.1% and core inflation down to 3.2, however, we really need to see the full quarterly numbers, next out on January 29th.
Third quarter core inflation was 0.8%, so to convince the RBA to cut rates in February, we will probably need a 0.5% number or lower for Q4, to get annual core inflation anywhere near 3%; but there are other factors to consider that will be highly influential, including (domestically) the path ahead for jobs.
Tight labour markets remain a two-edged sword: We have a remarkably resilient, low unemployment rate and still labour shortages, but a lower unemployment rate than the RBA would consider consistent with relaxing policy while inflation is above target; so, a rise in unemployment between now and February would change this equation.
As the chart shows, job vacancies have been weakening so the unemployment rate would normally rise as a result, but this correlation is yet to emerge.
The Reserve Bank’s latest forecasts only have unemployment rising to 4.3% in the coming months and then no higher than 4.5% for two years, while our forecasts detailed on our business insights website have a sharper rise to 5% over the next 12 months.
A number of other factors for our economic outlook and for the path of official rates come from overseas, including the recent stimulus package announced in China, together with some improved economic data from the region, but most influentially the US Presidential election where the return of President Trump is impacting exchange rates and driving higher bond yields with markets rethinking the depth of easing cycles ahead.
The US Federal Reserve are still expected to cut interest rates later this week by 25 basis points, but the Trump victory, with his commitment to ramp tariffs and cut corporate tax rates, may limit the ability of the Fed to keep cutting rates back to more neutral levels, so the Aussie Dollar, having reached a high of around 69 ½ US cents a month ago is sharply lower, below 66 cents.
How this all plays out will depend on who will control Congress and how quickly changes to US trade and fiscal policy will be implemented, but the immediate market reaction of a stronger US Dollar, higher bond yields and still near record highs for stock markets are adding to market volatility. The consequences for geopolitics and global trade will no doubt take longer to become clear.
In short, the RBA easing cycle remains on track but still appears most likely to start around May, while the depth of the cycle, subject to global developments, may be less than one percent; perhaps 35 basis points to start and then two quarter percent cuts to 3.5 % a year from now.
And that’s the market update from Bendigo Bank.
