RBA overnight index swaps markets have shifted back and forth between April and May as the most likely month for an initial 25-basis-point reduction this week, following dismal GDP growth results. At the time of writing, markets had fully priced a 25bp cut at the April 1 meeting and a 3.63% cash rate within 12 months.
The RBA last hiked the rate 25bp in November 2023.
NATIONAL ACCOUNTS
The Australian economy grew at 0.3% seasonally-adjusted over Q3, 20 basis points lower than expected, and 0.8% y/y, 30bp below expectations, according to National Accounts data published on Wednesday by the Australian Bureau of Statistics. The data showed an economy driven solely by government spending, with private investment at recessionary levels.
Markets swiftly readjusted their bets on RBA cuts following the GDP miss, bringing them forward a month to April, while the Australian dollar weakened about 1.3% against the greenback.
However, the accounts also showed a mixed picture on productivity, with GDP per hours worked falling 0.5% and unit labour costs also moderating by 1 percentage point to 0.5% over the quarter. While the lower productivity will jeopardise the RBA’s more longer-term inflation forecasts, the lower unit labour costs could put downward pressure on services prices in the short term.
INFLATION OUTLOOK
October's monthly CPI indicator showed trimmed-mean inflation at 3.5% y/y, sightly higher than expected. However, the RBA does not place too much emphasis on the monthly number and will instead hold out for a clearer read when the ABS publishes Q4 results on Jan 29.
But October’s monthly read showed promising signs of falling rent and housing costs, which closely track quarterly trimmed mean, and household goods prices, setting up Q4 quarterly data to surprise to the downside. (See MNI INTERVIEW: Q4 CPI On Track To Surprise - Ex-RBA Economist)
The RBA would consider a 0.5% q/q Q4 trimmed-mean result as very solid, while a 0.6% q/q print would likely require further verification. A 0.7% q/q read or higher would likely mean year-ended trimmed mean remains above the band by mid-year when the RBA expects it to reach 3.0%, the top of its target band, pushing back chances of an early 2025 cut.