Overview

• We have brought forward our expectations for the timing of rate cuts, now seeing a first cut in February 2025 (previously May). As discussed in our Monetary Policy Update, the change in timing largely reflects the shifting balance of risks on inflation with our forecast profile broadly unchanged.
• Importantly, we continue to see a gradual pace of cuts back to 3.10% by early 2026. This profile for the cash rate sees the RBA cautiously normalising policy settings back to neutral in an environment in which inflation has subsided but the labour market remains close to full employment and GDP growth is recovering towards trend – effectively a soft landing.
• We still don’t expect the RBA will be in a position to cut in November or December. While growth is very slow and will likely finish the year around 1.0% y/y, underlying inflation remains above the RBA’s target band and a range of indicators – including capacity utilisation in the NAB Business Survey – suggest the balance of supply and demand is still tighter than normal.
• The upcoming Q3 CPI print will be impacted by subsidy effects but the detail should show steady progress on inflation with trimmed mean expected to print at 0.8% q/q (3.5% y/y). There are encouraging signs on wage growth and rental vacancies that temper the upside risks to the inflation outlook, but we expect the RBA will want more evidence – likely in the Q4 CPI print.
• The labour market continues to evolve in line with, or slightly better than, we had expected. To date, the rise in the unemployment rate has been driven by supply with employment growth remaining robust, and we expect this to continue in coming months before stabilising around 4½% in 2025. On this trajectory, the labour market would not be an impediment to the RBA commencing a rate cutting cycle but nor would it generate pressure to rapidly ease policy settings.
• Housing markets continue to reflect a mix of dynamics, including strong population growth, supply constraints, elevated construction costs and affordability challenges. The strong price growth seen through 2023 has given way to a more mixed picture, with Brisbane and Perth prices still rising strongly but Melbourne and, to a lesser extent, Sydney more subdued. Overall population growth has passed its peak but the outlook for some monetary policy easing will likely be a support through 2025.

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