Steve Campbell: The RBA isn’t yet convinced inflation is a thing of the past. Here’s why

Australia is still unlikely to join the rate-cutting club before 2025, argues Pendal’s head of cash strategies, STEVE CAMPBELL

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THE Reserve Bank left rates unchanged this week as expected, but the more interesting insights came from its latest economic forecasts.

These were contained in the RBA’s quarterly Statement on Monetary Policy which sets out the central bank’s outlook – on which it bases its interest rate decisions.

The latest outlook revealed large downward revisions to headline inflation expectations due to the effect from electricity rebates.

Annual inflation for 2024 is now forecast at 3%, down from 3.8%.

However the RBA does not expect the rebates to be renewed, which would drive an upward revision of 0.9% to the 2025 headline inflation forecast as they roll off.

That would mean headline inflation of 3.7% for 2025.

This is why the RBA favours a trimmed mean, giving a more accurate representation of the true inflation in the economy.

To that end there was not much change.

Trimmed mean is expected to be 3.5% for 2024, returning to the top end of the band in late 2025. The revisions over the forecast horizons were either flat or +0.1%.

No rate cut anytime soon

The RBA will need to see a higher unemployment rate before taking comfort that inflation is a thing of the past.

Due to a tight labour market, the central bank is not yet convinced that wage inflation pressures won’t re-emerge.

Those looking for a rate cut anytime soon will be disappointed – in the absence of some large shock event.

An unemployment rate of 4.3% by year end doesn’t warrant policy easing.

However Pendal’s forward-looking indicators suggest the risks are skewed to that being higher than lower – and may set the case for monetary policy easing occurring early next year.

Public demand was also notably revised higher, supporting economic growth and offsetting the sluggish outlook near term for dwelling investment and business investment.

Uncertain forecasts

It’s clear there is a high level of uncertainty in the RBA’s latest forecasts.

Plenty of factors were offered as to why the economy could evolve on a different path to that forecast: 

• The lagged effect from past tightening
• Slowing growth against excess demand and how firms pricing behaviour responds.
• A tight labour market and wage inflation and how that evolves. 
• Unit labour costs and productivity, household consumption, the savings rate, the external environment.

These were just some of the factors.

There have been significant moves lower in yields since the start of July.

The US look as though they will ease monetary policy in September following the weaker non-farm payrolls report and the rise in the unemployment rate.

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In New Zealand the RBNZ produced a backflip worthy of an Olympian – and now looks like it might be easing multiple times this year.

The Bank of Canada has eased at consecutive meetings. The Bank of England kicked off its cutting cycle earlier this month.

The RBA remains the outlier with most other developed central, the other exception being the Bank of Japan.

How quickly the RBA joins the rate-cutting club will depend on how quickly it can garner certainty that inflationary pressures are a thing of the past.

At this stage that is not a 2024 story. 

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.

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