Why the RBA’s interest rate cuts are unlikely to commence until at least February

Inflation is declining but that’s not yet enough for the Reserve Bank to sound the all-clear and cut its cash rate, economists believe.

Australian homebuyers may have to wait until February or even longer for interest rate relief. Picture: David Swift

The Reserve Bank is now widely expected to hold off on interest rate cuts until February at the earliest after the underlying rate of inflation stayed well above target levels in the September quarter.

While the annual rate of headline inflation sank to a 3½-year low of 2.8 per cent due to the lower fuel prices and the impact of government subsidies on electricity price, the RBA is unlikely to change its view that it will be “sometime yet before inflation is sustainably in the target range”.

As expected by most economists, annual “trimmed mean” inflation – used by the RBA to gauge underlying inflation in the economy – fell from 3.9 per cent to 3.5 per cent versus its target range of 2-3 per cent. The quarterly change in trimmed mean remained at 0.8 per cent which was also in line with most forecasts, although many forecasters, including CBA, had expected a 0.7 per cent increase.

Commonwealth Bank head of Australian economics Gareth Aird.

“The disinflation process continues, but at a slower pace than we had forecast,” CBA head of Australian economics Gareth Aird said.

“The upshot is that we no longer expect the RBA to cut the cash rate in December 2024.

“Instead we pencil in February 2025 for a 25 basis point rate decrease.”

While the inflation data had virtually no impact on the Aussie dollar or bonds, the share market suffered from the lack of “downside surprise” in underlying inflation that many had expected.

With CBA giving up on a December rate cut and some other economists seeing a risk that rate cuts might not start in February, the ASX 200 index on Wednesday fell 0.8 per cent to a three-week low of 8180.4 points.

A significant profit warning by Woolworths hit the consumer staples sector.

Mr Aird said the RBA’s aggressive tightening cycle has “worked very well to slow growth in aggregate demand in the economy” and the bank should be encouraged.

“But the data was almost certainly a touch too strong on the key underlying measure for the board to entertain the idea of a rate decrease this year.

“The process of normalising the cash rate will be a story for 2025.”

In mixed signals for domestically-driven inflation, the annual change in the non-tradables CPI fell to 4.1 per cent, but service sector inflation rose to 4.6 per cent.

“Overall, the details of the data are mixed for the RBA’s focus on homegrown inflation; the slowing in non-tradables CPI is a good sign, but the persistence in services CPI is not,” UBS Australia chief economist George Tharenou said.

UBS Australia chief economist George Tharenou. Picture: Hollie Adams

The RBA has emphasised the need for a “sustainable” return to its inflation target and Mr Tharenou said rate cuts were unlikely before February – and the risk was that they would be later than that.

“RBA governor [Michele Bullock has conditioned that the return of headline inflation to the RBA’s 2-3 per cent inflation target must be sustainable, which we infer to mean one quarterly CPI print within the target band is unlikely sufficient by itself to cut rates immediately,” he said.

The official quarterly CPI showed services and trimmed mean inflation rates haven’t slowed as much as headline inflation, which is much more of a focus for the RBA.

“We still see the RBA lagging global central banks and not delivering the first rate cut of 25 basis points until February, but this still requires a second-consecutive relatively low CPI print in the December quarter, which is implied by the monthly indicator showing ongoing disinflation,” Mr Tharenou said.

But the RBA also needed to see some weakness in the jobs market.

Rate cuts could be delayed by the strength of the labour market, particularly if the Australian government announces additional fiscal stimulus before the election which must be held by May.

Similarly, Betashares chief economist David Bassanese said the lack of a downside surprise in the CPI data modestly weakened his expectation that the RBA would start cutting rates in February.

Betashares chief economist David Bassanese.

“Unlike in some countries such as Canada, the UK and New Zealand, Australia’s CPI data didn’t deliver a material downside surprise that might have justified a speedier pace of interest rate cuts,” he said.

“By the same token, Australia has also not experienced the weakness in economic conditions that these countries have faced since their central banks began raising interest rates.”

While still expecting a first rate cut in February, provided that the December quarter CPI data showed trimmed mean inflation rose no more than 0.7 per cent on quarter, he said February was “by no means a done deal”.

His concern was that the RBA could still judge annual trimmed mean inflation of 3.5 per cent and persistently sticky service sector inflation as insufficient progress in reducing inflation to justify a rate cut this early – absent a more notable weakening in the labour market.

Market pricing on the chance of a February rate cut fell to 52 per cent from 62 per cent on Tuesday.

A rate cut of 25 basis points wasn’t fully priced in until May.

The market was expecting less than 50 basis points of rate cuts by September 2025.

Originally published as Why the RBA’s interest rate cuts are unlikely to commence until at least February