Steve Campbell: Labour data will determine timing of next RBA rate cut

While policy remains in restrictive territory for the RBA, today’s rate cut is unlikely to be a one-and-done affair. Pendal’s Head of Cash Strategies STEVE CAMPBELL explains 

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AT its meeting this week, the Reserve Bank of Australia eased monetary policy by 25 basis points – taking the cash rate to 4.1%.

The move came with little surprise — the market had priced in an 80% chance of a cut.

This followed the RBA’s comment in December that it was “gaining some confidence that inflation is moving sustainably towards target”.

The central bank also saw an easing in wage pressure and upside risks to inflation — a view supported by fourth-quarter inflation data released in late January, showing annual trimmed mean inflation of 3.2% for 2024.

In its November monetary policy statement the RBA had forecast annual trimmed mean inflation to hit 3.4% by the end of 2024. The weaker inflation result was enough for the central bank to remove some of the monetary policy restrictiveness.

Policy does, however, remain in restrictive territory.

Strong labour data

While the RBA may have breathed a sigh of relief following the inflation figures, the same cannot be said of recent labour market data.

The RBA had forecast the unemployment rate ending the year at 4.3%; it ended at 4%. Meanwhile, the participation rate of 67.1% is a record high.

For those looking for no change this month, the labour market and lack of productivity were cited as key reasons for the RBA to remain on hold.

At its meeting today, the Board revised down materially where it sees the non-accelerating inflation rate of unemployment (or the NAIRU) from 4.5% to 4.2%.

Where to from here?

In this week’s statement, the RBA said: “The forecasts published today suggest that, if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range.

“In removing a little of the policy restrictiveness in its decision today, the Board acknowledges that progress has been made but is cautious about the outlook.”

As is the case now for all February, May, August and November meetings, the RBA’s decision also coincides with the release of updated economic forecasts though the Statement on Monetary Policy.

The following table shows the RBA’s forecasts released this week:

Some of the key forecast revisions to note:

• Trimmed mean inflation has been revised lower by 0.3% to June 2025 and 0.1% for 2025.
• The unemployment rate has been revised lower by between 0.2% and 0.3%.
• Wage inflation was revised up by 0.2% to 3.4% for 2025.

Where does this leave the RBA?

It is highly unlikely that it is a case of one cut and they’re done – so the focus will now move to when the next policy easing will occur.

The next meeting in April marks the first for the new Board structure, which separates it into a monetary board and a governance board, and comes into effect from the start of next month.

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Prior to its next decision on 1 April, the key domestic data will include wage price index data (due 19 February) and two labour market reports that will be key in determining whether the RBA goes back-to-back.

Even if it doesn’t cut in April, it is unlikely to be a one and done. Further policy easing could occur towards the middle of the year.

Leading into today’s announcement, the market had priced in at least three cuts for 2025. There had also been plenty of talk leading up to today about a hawkish cut – the RBA delivered that.

The RBA also didn’t give anything away; forecasting trimmed mean inflation at 2.7% until mid-2027 means we really don’t know how it will all unfold.

Any further policy easing in the second half of the year will depend on how inflation evolves. The RBA remain cautious and data dependent.

About Steve Campbell and Pendal’s Income and Fixed Interest team

Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.

Find out more about  Pendal’s cash funds:

Short Term Income Securities Fund
Pendal Stable Cash Plus Fund

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here