Inflation was already too high before the Middle East conflict for the RBA not to act. The knock-on effects from higher oil prices only intensify the inflation risks, explains Pendal’s head of cash strategies STEVE CAMPBELL
THE Reserve Bank tightened monetary policy by 25 basis points for the second consecutive meeting, taking the cash rate to 4.1%.
It was a close call with five members voting to tighten and four calling for no change.
Leading into the decision the market had priced a 70% likelihood of a hike. This had changed quickly from February, when the market priced the probability of a hike at around 10%.
So, what changed? Several things.
First, the RBA had been deliberately emphasising March as a live meeting.
The probability of an increase rose to around 35% after a March 3 speech by RBA governor Michele Bullock. Her comments put a March move firmly in focus.
Earlier, there had earlier been a view that the RBA was more likely to change policy after the next quarterly inflation data was released in late April.
At the time Bullock shot this view down: “I am not making a prediction about March, but it will be a live meeting.”
On March 10, comments by RBA deputy governor Andrew Hauser saw market expectations move above 60%.
The comments came on a podcast, suggesting the RBA was already doing some preparation for the likely heavy criticism a hike would bring.
“If we fail to act decisively enough to prevent inflation staying high or even rising – and expectations of inflation dis-anchor – it will be bad for everyone.
“It’s worth us continuously reminding ourselves just how toxic inflation is.”
These comments changed market pricing. Alongside rising inflationary concerns, the market in Australia moved to price in multiple hikes by the end of the year, as shown in the following graph:
Secondly, hostilities in the Middle East encouraged a focus on a stagflation scenario.
In 2022 it took two weeks for bonds to lose the “risk off” bid and gain a very strong “inflation on” offer.
This time it took less than two hours – and again it is the “inflation”, not “stagnation”, part of stagflation driving interest-rate markets.
So, what happened on the domestic economic data front since the RBA’s February meeting?
January employment data showed a labour market that remained too tight for the RBA, with the unemployment rate staying at 4.1%.
The monthly inflation series showed annual inflation at 3.8% and trimmed mean at 3.4%, both marginally higher than market consensus.
Fourth-quarter economic growth rose by 0.8%, resulting in growth of 2.6% for 2025. The RBA’s forecast was for 2.3%.
None of this data would have comforted the RBA.
Find out about
Pendal’s Income and Fixed Interest funds
Inflation?
In her speech, Bullock noted that while there were temporary factors at play, some of the inflation pressure was due to demand exceeding the economy’s supply capacity.
The RBA is concerned that the longer inflation stays above the target, the greater the risk that people expect inflation to stay high.
Growth?
Australia’s economic growth over the second half of 2025 surprised the RBA.
Private demand was stronger, the global economy held up better than expected and financial conditions were seen as easier than previously thought.
Throw into the mix the supply side of the economy that is now seen as having less excess capacity to absorb the pickup in demand.
The conflict in Iran?
Obviously this puts upward pressure on inflation and threatens economic growth both in Australia and with our major trading partners.
Both Bullock and Hauser did make a point on the effect of a higher oil price.
Australia is a net energy exporter and “if you assume that the oil price is well correlated with the price of gas and other outputs that we export, there will be some positive demand effect for Australian exporters that offset some of those effects on activity”.
The issue for the RBA was that inflation was already forecast to be above its target band for 2026 prior to the Iran conflict.
The move higher in the oil price only increased the risk that higher inflation expectations become more embedded.
Today’s decision ended up being a close call.
Inflation remains too high.
That was the case before the conflict in the Middle East. Events in Iran only added to inflation risks and the RBA responded. Just.
Where to next for the RBA is anyone’s guess. The next meeting is on May 5. As shown since its last meeting, six weeks is a long time and things can change quickly. Buckle up
If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through your account manager by reply email.
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.
Rates are on hold, but the market is pricing in a 30 per cent chance of a hike in the March quarter. Pendal’s head of cash strategies STEVE CAMPBELL explains what’s changed
THE Reserve Bank left the cash rate unchanged at 3.6% at its December meeting.
No change was expected.
At today’s meeting the RBA acknowledged that inflation had picked up recently – though some of the increase was due to temporary factors.
A new monthly inflation series from the Bureau of Statistics (more on that later) won’t be relied upon by the RBA for a while, but some components are showing a more persistent rise.
A year ago a noticeably dovish twist in the RBA’s December 2025 meeting set up market expectations for a February 2026 rate cut – which was ultimately delivered.
Today a hawkish twist was expected based on the RBA’s November meeting. On Cup Day two options were discussed for nearer-term monetary policy decisions: no change or a rate cut.
At that point, rate hikes didn’t come into it.
The case for a cut was based on a materially weaker labour market or a pull-back in spending and dampened growth due to increased household caution.
If either had eventuated, the potential increase in excess capacity may have warranted further easing.
A change in market pricing
So what’s happened since Cup Day?
Market pricing has moved significantly. Rate cut expectations are gone, replaced by potential hikes.
A rate hike in the March quarter is priced around a 30% chance. The following graph shows market pricing for the RBA cash rate following the November meeting and pricing leading into this week’s meeting:
What was the catalyst for change?
It wasn’t the stronger labour market data which saw unemployment fall to 4.3%.
It wasn’t the better household consumption spending in the quarterly accounts released in early December.
It was the new monthly inflation data released in late November, which saw yields move sharply higher.
The data showed annual trimmed mean of 3.3%. That is outside the RBA’s 2-3% target band and is moving in the wrong direction!
What is the new monthly inflation series and why does it have this impact?
The new ABS series covers the monthly move for 87% of the inflation basket.
The remaining 13% have one-off annual changes for items such as school fees, council rates and health insurance premiums.
There will be some volatility in this new series. It will take time to bed down seasonal adjustments before the RBA uses it to determine if changes to the cash rate are required.
For now, the quarterly inflation series remains the key inflation data input into decision making.
The new monthly data caused some concern but it will be more volatile in its infancy.
To hike or not to hike?
The RBA would be one of the few outliers among most central banks if it was to hike early next year.
Or, indeed, if it hiked at all in 2026.
The other outlier is the Bank of Japan, which is expected to tighten policy at its meeting on December 19.
Other central banks are expected to ease further or remain on hold for most of 2026.
In the United States, the Federal Reserve is priced for around three cuts by the end of 2026.
The Bank of England has two cuts for the same period.
If market pricing was to eventuate it would leave Australia with the highest policy rate among developed market economies by the end of next year.
As you can see, while we’ve had the highest rates at various points we also have tended to move in the same direction as other central banks.
What’s driving the change?
The issue this time – particularly relative to the US – comes down to labour market slack.
Both countries are above their inflation targets.
In the US, expected weakness in the labour market is seen as exerting downward pressure on inflation, providing scope for the Fed to remove some policy tightness.
In Australia, inflation momentum is going the other way at a time of high uncertainty in the labour market.
The RBA looks at the unemployment rate as well as a host of other indicators when assessing the labour market – job ads, vacancies, business liaison.
The labour market has been assessed as remaining slightly tight.
The NAB’s business survey also shows capacity utilisation remaining at elevated levels.
The RBA’s deputy governor Andrew Hauser commented on this in a speech in November, observing that this time around we may not have much excess capacity in the economy.
If economic growth picks up with no improvement in productivity, then inflation outcomes will be less than desirable.
That means rate hikes are coming.
What’s next
What are the key data releases that will determine what’s next for the RBA?
The ABS’s next monthly inflation series is released on January 7, but the fourth-quarter inflation data released on January 28 will be the major factor.
The RBA doesn’t want to swim against the tide. One more upside inflation surprise means the RBA may be close to hiking in the first half of next year.
If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through your account manager by reply email.
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.
Where to next after the Reserve Bank kept rates on hold at its Melbourne Cup Day meeting? Pendal’s head of cash strategies STEVE CAMPBELL explains
THE Reserve Bank left the cash rate unchanged at 3.6% on Melbourne Cup Day.
The result was as expected with the market pricing in a less than 10% probability of a rate cut.
Expectations for a cut had increased significantly following labour market data released in mid-October which saw the unemployment rate increase from 4.3% to 4.5%.
The result was driven by an increase in the participation rate rather than a fall in employment growth and saw the market move to price in around an 80% chance of a cut.
That all changed following the release of the third-quarter inflation in October.
Preceding the release, RBA Governor Michele Bullock was asked what would constitute a miss on the inflation forecast.
The RBA had forecast third-quarter trimmed mean inflation of 0.6% – and 0.3% would have been seen as a miss.
The actual result came out at 1% for the quarter, resulting in annual trimmed-mean inflation of 3%.
The result effectively killed any chance of a rate cut on Cup day.
So where does the RBA see things going forward? The RBA provided an updated set of forecasts via their Statement on Monetary Policy, as shown in the following table:
The most noticeable revision is to the trimmed mean in the nearer term.
It is not surprising there were upward revisions given the third-quarter inflation forecast miss.
The December 2025 and June 2026 forecasts were revised 0.6% higher to 3.2%.
There is clear concern from the RBA around housing and market services – key drivers of the higher third-quarter inflation.
Should there be less spare capacity in the economy than the RBA thought, it would leave them in an uncomfortable position if economic growth picked up.
What about the labour market?
The 4.5% unemployment rate indicates more slack and some prospect of a rate cut.
In her press conference, Governor Bullock pointed to a host of other labour market indicators which suggest the labour market is tighter than the unemployment rate implies.
The RBA’s updated forecasts showed only modest changes to unemployment forecasts.
Where next for the RBA?
If the RBA’s inflation forecast is realised, it is difficult to see any easing from the RBA until the second half of 2026.
Inflation at 0.7% above the mid-point of the target band – and disinflationary pressures not as imminent – don’t support a case for a further rate cut.
If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through your account manager by reply email.
Find out about
Pendal’s
cash funds
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.
Where to next after the Reserve Bank kept rates on hold at its September meeting? Pendal’s head of cash strategies STEVE CAMPBELL explains
THE Reserve Bank left the cash rate unchanged at 3.6% at its September meeting.
No change was expected.
Market expectations for further easing were pared back following a stronger-than-expected monthly inflation data released prior to today’s meeting.
The monthly series showed annual headline inflation of 3% and trimmed mean at 2.6%.
Components of this number did cause some upward revisions to economists’ forecasts for the more comprehensive third-quarter inflation data due for release on October 29.
(For more details please refer to this article from our head of government bond strategies Tim Hext.)
Yields moved higher in the front end of the curve following the RBA’s decision.
In their statement the RBA noted that “private demand is recovering a little more rapidly than expected”, and the housing market is strengthening.
The market now has around a 40% chance priced in for a rate cut on Melbourne Cup day.
At the start of September it was priced as all but certain.
The RBA has scope to ease policy further – if required.
With 75 basis points of easing so far – and signs of life emerging from household consumption – the case is building for the RBA to remain on hold for the rest of 2025.
Inflation may come in a bit higher than expected in October, but it should not derail further easing.
The RBA seems comfortable with the end destination at the moment – it may just take a little longer to get there.
Should that occur, the meeting in early February would be the next opportunity.
If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through your account manager by reply email.
Find out about
Pendal’s
cash funds
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.
Where to next after today’s Reserve Bank cash rate cut? Pendal’s head of cash strategies STEVE CAMPBELL explains
IN a unanimous decision at its meeting today, the Reserve Bank eased monetary policy by 25 basis points to 3.6%.
Similar to July, the market priced this cut as all but certain. This time there was no surprise.
The RBA also provided updated economic forecasts in its quarterly monetary statement. Some things change, some things stay the same.
That’s not surprising given its prior forecasts in May were set against heightened uncertainty from the tariff man.
The following table shows the RBA’s latest forecasts:
The big factors remaining unchanged are headline and trimmed mean inflation, as well as unemployment rate forecasts.
Changes to the growth forecast are particularly noticeable.
Growth is revised lower by 0.1% to 0.4%. These downward revisions aren’t a reflection of our trading partners – a modest revision lower over the next 12 months is followed by a pick-up from mid-2026.
One of the drivers in the lower growth forecast is a lack of productivity growth which affects supply in the economy.
In her press conference, Governor Michele Bullock pointed out that the RBA doesn’t forecast productivity growth.
Its forecasts for employment and inflation have been close to what’s been occurring.
Economic growth, however, has disappointed – which the RBA has reconciled by lowering productivity growth assumptions.
Weaker public demand growth and business investment also contributed to this weaker growth outlook. Offsetting this was a better outlook for household consumption and dwelling investment.
Where do the economy and rates go from here?
We don’t expect a follow-up cut at the RBA’s September meeting without a sharp deterioration in the global environment.
November remains more likely.
Quarterly inflation data remains key, with the next release due in late October. This is more comprehensive than the monthly inflation data series which prompted some concern and was a key catalyst for remaining on hold in July.
Also key is the labour market, with the quarterly Wage Price Index and monthly employment data due in the two days subsequent to this meeting.
There are mixed messages about the strength of the labour market.
The RBA’s business liaison shows that firms continue to report difficulties finding staff while unit labour costs continue to increase. In contrast, the RBA notes that the rate of job-switching has declined notably from its 2022 peak.
Find out about
Pendal’s
cash funds
Should the unemployment rate move higher quickly or should inflation come in under expectations, the RBA can respond.
Policy settings aren’t overly restrictive.
With 75 basis points of easing delivered to date, the RBA would be encouraged by a pick-up in household spending and see little pressing need to ease policy again quickly.
Overall, nothing today makes me change my view that we will get one more rate cut this year at the November meeting.
What happens beyond year’s end will be significantly impacted by global events, but markets will still price for one or two more cuts in 2026 for now.
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.
What can investors expect following the Reserve Bank’s cash rate surprise? Pendal’s head of cash strategies STEVE CAMPBELL explains
THE Reserve Bank of Australia (RBA) surprised the market today by leaving the cash rate unchanged at 3.85%.
The market had priced in more than a 90% probability that the RBA would ease policy. Expectations for a cut had been set higher at the RBA’s previous meeting in May, where the case for a 50-basis point cut had been discussed.
Throw into the mix the weak first quarter economic growth data (+0.2% for the quarter and +1.3% for the year) and the set of conditions were seen as being in place for the RBA to ease.
At today’s meeting, however, the vote was 6-3 in favour of no change.
In justifying the decision not to move, the RBA noted that the monthly inflation was, at the margin, slightly stronger than expected and that 50 basis points in cuts have already been delivered.
This is buying the central bank time, with the Board noting it had “judged that it could wait for a little more information to confirm that inflation remains on track to reach 2.5 per cent on a sustainable basis.”
The information that the RBA needs will come via second quarter inflation data to be released in late July.
On economic growth, despite the weak first quarter result, the RBA does see some cause for optimism.
Domestic demand picking up over the past six months, along with a rise in real household incomes, were cited. The labour market also remains tight.
Uncertainty around inflation and growth, however, remains elevated due largely to US trade policies that remain unresolved.
The RBA sees monetary policy settings as being well positioned to deal with the fall-out should economic growth deteriorate sharply or should inflation fall more quickly.
Leading into today’s decision, the market had priced the cash rate ending the year just above 3%. That has moved closer to 3.25%.
For August, it is priced that the RBA is more likely than not to cut policy. But as today’s decision shows, the market doesn’t always get it right.
At her previous press conference, RBA Governor Bullock was somewhat dismissive of the monthly inflation data series. Today that data series gave the RBA enough to remain on hold.
The quarterly data series still reigns supreme and all eyes will be on 30 July when it is released. If it comes in line with expectations, then it is likely that the RBA eases policy in August.
Find out about
Pendal’s
cash funds
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.
Here’s what the latest monetary policy adjustments mean for investors, according to Pendal’s head of cash strategies STEVE CAMPBELL
THE Reserve Bank of Australia eased monetary policy for a second time this year, cutting the cash rate again by 25 basis points to 3.85%.
Monetary policy settings do remain in restrictive territory.
The market had flirted with the prospect of a 50-point cut after the turmoil that ensued from Donald Trump’s Liberation Day tariffs announced in early April.
This was pared back following a 90-day pause in tariffs and a plethora of other headlines which saw a diminished case for a bigger cut.
The RBA remains attuned to the risks to global economic growth and inflation.
Its statement noted that “the Board considered a severe downside scenario” and that “monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia”.
Accompanying today’s decision was the RBA’s latest set of forecasts through its Statement on Monetary Policy, as shown in the table below.
The RBA has revised its trimmed-mean inflation forecast lower by 0.1% across the forecast horizon.
(The trimmed-mean measure removes the most extreme price movements, providing a more reliable indicator of the underlying trend in inflation.)
The most recent annual trimmed-mean rate of 2.9% fell within the target band for the first time since 2021. The inflation outlook is more supportive for further policy easing if required.
Real household income in the nearer term has been revised higher, by 0.2% to 3.3% for the year ending June and by 0.1% to 2.6% for 2025.
The labour market, based on what the RBA is looking at, remains tight and employment continues to grow.
Today’s statement conveyed a sense that domestically the RBA remains comfortable with the inflation outlook and where policy settings are at. The upside risks to inflation have been diminishing further.
As with all central banks currently, uncertainty over US trade policy and the ramifications from that reign supreme.
However, the RBA is well positioned to ease more aggressively should the economy require stimulus.
There are signs the rate cut earlier this year is helping households, though the majority of the cut is being saved – not spent.
Find out about
Pendal’s
cash funds
A fall in petrol prices to their lowest level post-Covid is also assisting. Wages growth is finally exceeding the cost of living.
We maintain the view that two more cuts are forthcoming, likely around the quarterly cycle in August and November.
For investors, bonds continue to offer good defensive value in this environment.
And in the meantime, international events will still keep things lively and any uncertainty will see plenty of opportunity for active managers.
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.
In this video profile Pendal’s head of cash strategies Steve Campbell explains how the team’s approach to managing cash puts us in a market sweet spot
AS a “safe-haven” asset, cash can be the best-performing asset class when markets come under pressure.
But liquidity in cash is key, says head of cash strategies Steve Campbell, who likens it to “the Steven Bradbury of asset classes”.
“It’s the best-performing asset when others come under stress – and we’ve seen that over the past ten years through various experiences, like Covid,” he says. “But the main thing with cash portfolios is our investors need to know that when they want their money back, that they’re able to access it.”
In this video, Steve – who has more than 25 years of experience in cash and dealing roles – explains how he structures portfolios for Pendal’s broad client base in a way that aims to balance risk and return.
“I will never compromise a slightly higher return by trading that off against liquidity, where I might not be able to get my money back to the client,” he says.
Portfolio decisions are supported by a broader team dynamic which promotes a cross-pollination of ideas and “a better understanding of the risks before you implement portfolio decisions”.
Pendal’s size is one of its strengths, he adds. “One of the advantages that we have is we’re in the ideal sweet spot in the Australian market … Our size is big enough that we’re important, but also small enough that it means our investors are getting the best result at the end of the day.”
Watch the video to learn more about Steve and Pendal’s active approach to cash investing.
Get to know the rest of the team better in these individual profile videos:
Find out about
Pendal’s
cash funds
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.
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
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.
Find out about
Pendal’s
cash funds
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.
Anyone looking at policy easing in the near term will be left disappointed, says head of cash strategies STEVE CAMPBELL
THERE was no change from the Reserve Bank of Australia at its November meeting, with the cash rate left unchanged at 4.35%.
No surprises there – if only picking the winner of the Melbourne Cup was as easy.
Anyone looking at an easing of policy in the near term will be left disappointed.
Headline inflation fell sharply in the third quarter due to the effects of energy rebates and some state subsidies. The trimmed mean – one of the RBA’s preferred measures – stripped out these effects and showed annual inflation at 3.5%, in line with the RBA’s forecast.
We also got an updated set of economic forecasts via its Statement on Monetary policy (SoMP). These forecasts show the RBA not seeing “inflation returning sustainably to the midpoint of the target until 2026”.
Inflation is moving in the right direction but remains too high for the RBA to comfortably entertain the idea of policy easing anytime soon.
As has been the case for a while, the level of uncertainty remains high.
Looking at household consumption, its contribution to economic growth has been poor recently due to falling real incomes.
The RBA does expect this to turn, however, with household disposable incomes forecast to rise by 3.9% by the middle of next year.
The labour market also remains tight. The participation rate is at record-high levels and employment growth over the past quarter has been strong.
The RBA forecasts unemployment at 4.3% by the end of this year, before rising to 4.5% by the end of 2025. That does not sound like easing anytime soon.
What about other central banks that have started easing policy – shouldn’t we be following suit?
The following graph shows policy rates over the past 20 years.
Australia and Norway are the last to the rate cut party. Japan doesn’t want to join the party at all after hiking in July, with the prospect of further tightening possible.
The RBA noted that other central banks have eased because they’ve become more confident that inflation is moving back towards their targets.
Expecting the RBA to follow suit in the near term is likely to lead to disappointment. The next move from the RBA will be a cut, but we don’t need to immediately follow the actions of others.
The period pre-GFC shows the US Federal Reserve and Bank of Canada easing against the RBA hiking – different circumstances, with the mining boom sucking up a lot of labour resource and driving wages higher.
Similarly, the period from mid-2016 had other central banks tightening and the RBA remaining on hold in an environment of tepid domestic inflation. The RBA didn’t tighten as early nor as aggressively as other central banks.
Policy is tight, but as the labour is showing it is not so tight that it is strangling the economy. And with disposable incomes likely picking up, the market timing of a first rate cut in May does not seem unreasonable
Find out about
Pendal’s
cash funds
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.