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RBA February SoMP – RBA to hold nerve on soft landing despite higher underlying CPI and wages

• The RBA meets next Tuesday and we expect the Board will deliver another 25bp increase. Important for the outlook will be updated forecasts, previewed in the post-meeting statement and detailed in Friday’s SoMP on 10 February. We expect the forecasts to continue to draw a path to a soft landing, but the characterisation of the risks will be key to determine whether the RBA continues to be confident that it can return inflation to target without pushing rates deep into restrictive territory.
• The RBA has been categorising the wages backdrop in Australia as more benign than other advanced economies and at a level consistent with at-target inflation. Even as Q3 WPI data printed higher than the RBA’s implied November SoMP forecasts, Governor Lowe still assessed that data as “aggregate wage outcomes…have been consistent with a return of inflation to target”. For Q4 we expect another strong WPI, meaning WPI could reach 3.5% y/y, some four-tenths above the RBA’s forecast for 3.1%. The near-term wages forecast will have to be revised higher.
• Looking forward, the characterisation from the RBA’s business liaison will inform the skew of risks. The forecast horizon will be extended to mid-2025, which we expect to be enough to see the RBA forecast inflation back within the 2-3% band. The assumed cash rate path is likely to be similar to November, which had a peak of around 3½% in mid-2023 and 3% by end 2024. If the RBA can’t forecast inflation back in the band even at that horizon, it would plant the risk for a cash rate peak towards 4%. NAB sees the cash rate increasing by 25bp in February and March to a peak of 3.6%.
• As we noted in last week’s AMW, there are some indications labour market tightness is starting to ease as population growth returns and the compositional of labour supply normalises. SEEK Job Ads suggest labour tightness has eased, and advertised salary growth showed a tentative slowing in December. As for inflation, underlying inflation forecasts will be revised higher in the near term. Q4 trimmed mean CPI at 6.9% y/y was four-tenths hotter than the RBA’s forecast of 6.5%.  On the positive side, since November there should be greater confidence in the outlook for goods and construction disinflation, while the government intervention in the energy market should lower the peak in utility prices.

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