RBA to hold rates steady in September. November 25bp cut still the base case but not fully certain.
- We affirm our expectation that the RBA will hold the cash rate steady at 3.6% at its end-September meeting next week. An upside surprise in the August monthly inflation data will add a note of caution to its communication.
- We continue to expect that the RBA will cut the cash rate further over time. While a November timing of the next cut is now less certain, it remains our base case. We do not read either the August result or latest geopolitical developments as implying a renewed inflationary trend. Developments in the labour market are also an important counterweight to inflation concerns. Slow employment growth and declining vacancies confirm that the labour market is gradually softening.
- With the economy already broadly at full employment and inflation at target, the RBA will not rush to cut rates, but neither will it see a need to keep policy unnecessarily restrictive for an extended period. The timing of future rate cuts remains uncertain and it is possible the RBA ends up cutting by less than our current base case. Nonetheless, cuts in November, February and May remain our base case.
We already believed that the RBA would remain on hold at its September meeting and keep the cash rate at 3.6%. Anyone who thought there was a lingering chance of a cut next week will have ruled it out following this week’s August partial inflation data.
We nonetheless continue to expect that the RBA will cut the cash rate further over time. While a November timing of the next cut is now less certain, it remains our base case. We do not read either the August result or latest geopolitical developments as implying a renewed inflationary trend.
Having made the mistake three months ago of over-weighting the implications of the monthly inflation data for the RBA’s decision-making, we think it is prudent to avoid taking too much signal from the August partial inflation data about trends beyond the September quarter. And even if September quarter trimmed mean inflation ends up being even higher than our revised nowcast, the real question for monetary policy is the inflation outlook beyond the quarter now ending.
Some of the components that surprised on the upside in August (e.g. clothing) typically see some payback in the following month/quarter. And while services inflation was a bit higher than expected, this was not consistently true across the detail. In particular, the pick-up in inflation in prices of meals out and takeaway is consistent with the recovery in jobs growth in the hospitality sector over the past couple of quarters, following a significant retrenchment over 2023–2024. Some rebuilding of margins could be expected in these circumstances, but we do not think this necessarily implies ongoing higher inflation in this sector. Likewise, to the extent higher prices of meals out reflected higher food prices, ongoing higher inflation is unlikely given the latter’s volatility.
Nor do we see fresh inflationary impetus coming from abroad. China remains a source of global disinflation in tradeable goods. Some upside to global energy prices might emerge from Ukraine’s increasingly successful ranged campaign against Russia’s oil supply. This may be given further impetus by the change of tone on the war coming out of the US (it turns out President Trump despises ‘losers’ more than he admires autocrats). But we assess that the sustained price impact of a major decline in Russian oil supply would be small, of the order of a few dollars per barrel.
The main area where the August inflation data might be signalling a stronger ongoing trend is in homebuilding costs. Some of the surprising strength in this component in August reflected an unwinding of earlier price discounting by builders. This is a levels effect that should not be expected to boost price growth on an ongoing basis. However, we cannot rule out that the underlying trend growth in building costs is higher than the rates seen late last year before the period of discounting.
Beyond the current quarter, our forecasts continue to see trimmed mean inflation comfortably inside the RBA’s 2–3% target range and drifting a little below the midpoint next year. Indeed, even allowing for a stronger outcome in the September quarter, our forecast for the second half of 2025 (taking September and December quarters together) is in line with the RBA’s August forecasts. Part of this reflects that, if at least some of the August result is noise and there is some payback in the month of September, then all else equal, this flows through to a lower quarterly average for the months of the December quarter relative to the September quarter as well.
We are also mindful that the labour market is softening gradually, consistent with the usual lagged effects of previous tight monetary policy. Employment growth has slowed more than expected, and this week’s ABS job vacancies data confirm that the past tightness in the labour market is still unwinding. In addition, our longer-term view is that the rising trend in labour force participation has further to run in Australia. This contrasts with the RBA’s forecast of a steady participation rate from here, and the recent small step down in the participation rate and underemployment as cost-of-living pressures ease, reducing the need to supply additional labour (as we had previously flagged was likely). If we are right, the RBA could be surprised by the extent of labour market slack a few quarters from now; this is the logic behind our own forecast for unemployment being a little higher than the RBA’s. Wages growth and thus inflation would also surprise the RBA on the downside in that scenario.
Inflation is within the target range, and the labour market is broadly fully employed and softening gradually. We do not think this combination warrants tight monetary policy. At a 3.6% cash rate, monetary policy is probably not that tight, but some reduction would still be needed to avoid a needless undershoot of the inflation target. Indeed, the RBA’s own August forecasts embed an assumption that further rate cuts will be required to achieve its inflation forecast of trimmed mean inflation broadly around the target midpoint. We concur. The timing of future rate cuts remains uncertain and it is possible the RBA ends up cutting by less than our current base case. Nonetheless, 25bp cuts in November, February and May remain our base case.
