Key Points

• We now expect the RBA to remain on hold for longer, with a first rate cut now unlikely until May 2025 (previously November 2024). From there we see a steady profile of one cut per quarter back to 3.10%, now reaching that point in mid-2026.
• Economic growth has slowed significantly over the past year as the effects of monetary policy have flowed through, and the labour market has started gradually easing. However, progress on inflation has been slower than we (and the RBA) had expected with the May Monthly CPI indicator signalling upside risk pointing to our expectation for a Q2 trimmed-mean print of 0.9% q/q and 3.9% y/y.
• The mix of slow growth and gradual progress on inflation reflects the RBA’s decision to embrace a “lower for longer” approach – a lower rate peak compared to other advanced economies, resulting in a longer period at that peak. It is possible the Board will change course and raise rates at its August meeting (especially if the Q2 print exceeds expectations) but with the labour market easing we don’t believe their hand will be forced.
• Instead, we expect the Board will remain on hold with inflation still likely to slow in H2 alongside further easing in the labour market. However, we believe it will be some time before the Board has the confidence to begin to ease policy settings – likely only after several quarters of inflation annualising around the top of band. This may be in hand by February but we see May, after the Q1 2025 CPI, as most likely.
• Inflation should continue to moderate towards the mid-point of the RBA’s target range through 2025 and 2026, though the path will likely be uneven. This will see the focus shift back towards growth and the labour market, leading the RBA to continue bringing the cash rate back towards a more neutral level, which we see as around 3%. A slower pace of cuts, or higher end point, remains possible.

For further details, please see the NAB Monetary Policy Update (26 June 2024)