Bottom line:

The board has gained some confidence in the recent forecasts that show inflation tracking back toward target. This is important, because like other central banks, it will be keen to reduce the degree of restriction once it is confident that inflation will return to target so that the labour market doesn’t weaken too much. Today’s evolution suggests that a first interest rate reduction in February can no longer be ruled out and a 25bps reduction in April and/or May is very likely.

Key points:

• The RBA board – like that of other central banks – has been wanting to gain further confidence that inflation is moving sustainably toward target before reducing the degree of monetary restriction the Australian economy, businesses and some households are under.
• Today’s statement marks a clear evolution toward the first cut in interest rates, with the phrasing indicating that the board is gaining some confidence in the latest inflation forecasts repeated not once but twice. This will likely see the market attach a higher probability to the first easing being delivered at the February board meeting.
• The lower than expected wages outcome, no doubt somewhat weaker than expected activity and GDP data, and perhaps the better than expected (but volatile) monthly CPI indicator are likely behind the board’s increased confidence. Softer housing construction costs and easing advertised rents in the Q3 CPI also will moderate previous very strong housing cost growth as 2025 progresses. Working in the other direction have been indications that consumer spending picked up in October and November (not especially evident in the NAB Business Survey today) and continuing strength in the labour market, including renewed declining trends for underemployment and youth unemployment, the latter both very reliable signals of either labour market strength or weakness. The latter suggest a modest easing cycle of 50-100bps when it commences, ahead of the uncertainties related to President Trump’s tariff and immigration policies.
• It’s always been likely that the RBA – like other central banks – would remove some policy restriction once it felt more confident that Australian inflation was sustainably trending back to target. Today’s statement is an important and significant step in that direction and does appear to open up an interest rate reduction before the May 2025 board meeting.