The Reserve Bank of Australia (RBA) held the cash rate at 4.35% after its meeting in early November, marking a year since the central bank made a change to the official interest rate.
The latest consumer price index (CPI) showed a further slowdown in headline inflation. It rose 2.8% in the September 2024 quarter compared to 3.8% in June, according to the Australian Bureau of Statistics (ABS). This brought inflation back to within the RBA’s target range of 2-3%.
Underlying inflation, which excludes volatile items like petrol and electricity, rose 3.5% in the September 2023 quarter, down from 4.0% the previous quarter.
With inflationary pressures easing, market commentators are increasingly focused on when the RBA might begin to cut rates.
RBA
The central bank has been non-committal on its next move. Following its November monetary policy meeting, the RBA reiterated its focus on bringing inflation “sustainably” within the target range. It added that its forecasts see underlying inflation (currently at 3.5%) returning to the midpoint of the 2 to 3% target in 2026.
As a result, the RBA said the outlook for the cash rate remains uncertain.
Big four banks
The major banks are largely in agreement in their forecasts, predicting that the first rate cut will occur in February 2025.
The Commonwealth Bank (CBA) has up until recently been the outlier, originally predicting a rate cut in December. But, following the RBA’s November meeting, CBA revised its view to agree with the other banks on a February cut.
But, ANZ’s CEO, Shayne Elliott, has cautioned against being too hopeful of a cut in February. He told 9 News in October, “People are taking it for granted that cuts are going to be early [2025], and I worry that they may be a little bit further away.”
He noted that inflation “appears to be a little more set in than we may like”.
Factors influencing rate cuts
Unemployment. One of the key factors affecting the RBA’s decision-making is the unemployment rate, which has remained low in recent months, measuring at 4.1% for the second consecutive month in September according to the ABS. A low unemployment rate typically suggests a strong labour market, which might lead to higher wages as companies compete for a limited pool of workers.The RBA has to maintain a difficult position between wanting people to have jobs while ensuring wages are not driven unsustainably high by a strong labour market. In its own projections, unemployment is expected to rise next year, reaching 4.5% by the start of 2026. As a result, it said, “Wages growth is expected to continue to slow gradually over this time.”
CPI. While headline inflation has eased, underlying inflation remains above target. This is largely because the September headline inflation reflected potentially unsustainable good news with electricity and petrol prices, both of which were affected by external factors:
- Electricity rebates: The 2024-25 Commonwealth Energy Bill Fund helped lower costs over the last quarter.
- Fuel prices: Oil prices dropped globally, which helped ease the cost of petrol and other fuel products.
As a result, the RBA believes headline inflation will increase in the second half of 2025 (particularly when the energy rebates end) before declining again to align with underlying inflation.
The overall strength of underlying inflation has been driven by the rental market and services sector. Over the next year, the RBA predicts services inflation will ease as the labour market softens.
Rent inflation. Rents were up 6.7% annually in the September quarter according to the ABS. While this was down from the previous quarter’s 7.3%, it is still very high. The decline is largely due to the Commonwealth Rent Assistance programme which has reduced the amount of rent payable by eligible tenants.
The RBA forecasts that housing costs will ease over the next year as population growth slows, incomes decline and supply challenges in the housing market improve.
What’s next for interest rates?
The timing of the first rate cut remains uncertain, with the RBA revealing only that it will continue to rely on the data and changing risk assessments in its decision-making. The central bank’s ultimate goal is to return inflation to target and it “will do what is necessary to achieve that outcome”.