Overview

• We now expect the RBA will start cutting rates in May 2025 (previously February) – back to where we were in September. As outlined in our Monetary Policy Update, the main reason for the change is that the labour market has been stronger than expected.
• The unemployment rate was 4.1% in October and it has been essentially unchanged since April. Other labour market indicators continue to point to a tight labour market and wage growth remains above the level consistent with the RBA’s inflation target (given the weakness in productivity). With capacity utilisation also still above average, this indicates that there is still excess demand. While the demand/supply gap has been easing, progress has been only gradual.
• Q3 CPI inflation came in as expected, with a sharp fall in headline inflation to 2.8% y/y, but this partly reflected the impact of electricity subsidies and trimmed mean inflation, while also moderating, was 0.8% q/q (3.5% y/y) and so still above the RBA’s target. Components of the CPI sensitive to domestic demand are also showing some persistence at an elevated level.
• While growth is likely to have remained soft in Q3, it should improve from there, returning to an around trend pace over 2025 and 2026. The pick-up in Q3 retail sales volumes is a sign that improving household finances are starting to filter through to activity. While we have lowered our near-term unemployment rate expectations, the still soft GDP growth in the second half of this year should see the unemployment rate move higher, and it is still expected to peak at around 4.5%.
• Once the RBA starts reducing rates, we expect it will do so only slowly, with the cash rate not expected to move back to neutral (3.10%) until mid-2026. Even with an unemployment rate of 4.5%, the labour market would be close to full-employment, and with around trend GDP growth, and inflation only expected to reach the mid-point of the RBA’s target band by mid-2026, there will be no pressure on the RBA to move rates down quickly.
• The election of Donald Trump as US President is likely to lead to material changes in US policy, although when, and to what degree, is highly uncertain. A key exposure for Australia will be how possible tariff increases affect China and the flow through of likely lower global growth to commodity prices. One immediate impact has been for the AUD/USD, for which we have lowered our projections.

For further details, please see The Forward View Australia (November 2024)