RBA Tracker

Undershooting inflation likely to prompt 'hawkish' rate cut

The rate of (underlying) disinflation in Australia towards the end of 2024 appears to have been faster than the RBA anticipated.

At the same time, however, labour market resilience continued, with some key indicators even pointing to modest labour market tightening late in the year.

So how will the RBA Board square all this?

Inflation is the ultimate lagging indicator. Encouraging signs of faster-than-expected disinflation likely reflect earlier weakness in the Australian economy in addition to ongoing unwinding of pandemic-related inflation echoes (e.g. insurance).

But government rebates are also likely to have subtracted roughly 0.2ppts from Q4 quarterly trimmed mean inflation. We suspect that this effect was only partly incorporated into the RBA’s Q4 trimmed mean inflation forecast which was finalised soon after the release of the Q3 CPI. Information contained in subsequent monthly CPIs has allowed a more informed estimate.

Signs of an improvement in labour market conditions - e.g. falling unemployment rate, higher job vacancies and rising share of firms reporting reduced availability of suitable labour - have come as a surprise and are a bit difficult to square with the weakness in GDP growth. It may reflect the skew to strength in public spending and non-market sector hiring. Slowing net immigration may also be starting to play a role, as evidenced by recruitment difficulty increasing solely for low-skilled positions. Of course, it’s also possible that GDP growth will get revised higher.

The latest Board Minutes already skewed dovish. As highlighted in our write-up, the Minutes noted that “it would, in due course, be appropriate to begin relaxing the degree of monetary policy tightness” if “the future flow of data continued to evolve in line with, or weaker than” the Board’s expectations.

“In due course” can be interpreted in different ways. But the Minutes highlighted that key data and updated staff forecasts would be in hand at the February Board meeting.

If the stars aligned for a cut in mid-February why would the Board wait?