RPT-MNI: Weak Q4 CPI For Early 2025 RBA Cut, NAIRU Rethink

MNI (SYDNEY) - (Repeats story first published Dec 13) 

Strong employment data means fourth-quarter inflation would need to fall significantly and force the Reserve Bank of Australia to reconsider its view of the neutral level of unemployment in order to prompt it to ease early next year, former staffers and an independent economist told MNI, pointing to May as the most likely month for an initial cut of the cycle.

“I wouldn’t rule February out completely, but these numbers do make it look much less likely than it was,” said Blair Chapman, senior economist at employment website Seek and a former RBA research economist and lead analyst, pointing to Thursday’s labour market data. “A significant decline in inflation might force the RBA to reassess their NAIRU [non-accelerating inflation rate of unemployment] estimate, but the next WPI [wage price index] being on Feb 19 also makes that unlikely.” 

The unemployment rate tightened 20 basis points to 3.9% in November, 30bp better than expected, while 35,613 jobs were created, more than the 25,000 anticipated, Australian Bureau of Statistics data showed.

“Next week we will get a read on which industries drove the increase in employment,” Chapman said. “If it’s all retail than it might be a temporary drop reflecting seasonal hiring for Black Friday. The ABS mentioned a lot of people waiting to start work in October, which could possibly reflect that seasonal hiring. Although, full-time work drove the increase in employment." 

The numbers, however, showed a pick-up in unemployed people leaving the labour force in recent months.

"And we saw a decline in the part-time rate this month,” he noted.

STRONG LABOUR

Markets reacted strongly to the RBA Board’s dovish tilt this week following its decision to hold the cash rate at 4.35%, swiftly pricing in two 25bp cuts at the April and May meetings and putting a 60% chance on a February reduction. (See MNI RBA WATCH: Board Holds, But Turns Slightly Dovish) Traders paired back their bets on February to a 47% probability following the employment data, but April and May remain fully priced. 

James Morley, professor of macroeconomics at the University of Sydney, said a surprise move lower in Q4 inflation would suggest the RBA’s NAIRU estimate, last noted at about 4.5%, is lower than the current view. “NAIRU changes more over time than policymakers tend to believe,” he said. November’s employment growth was equivalent to the U.S. adding about 400,000 jobs, Morley added. 

“I think it does put off the timing [of cuts] in that there would likely need to be both better-than-expected news on inflation, including trimmed mean, and also substantially weaker labour market indicators for December and January,” he argued. “I don’t think this is the most likely scenario. May seems more likely than April given more information will be available on inflation for Q1.”

Callam Pickering, APAC senior economist at employment website Indeed.com and former senior analyst at the RBA, said the Reserve is unlikely to cut rates until it sees sufficient progress on service-sector inflation and a considerable improvement in productivity growth. “Holding rates high and keeping them steady, at least for now, appears to be the most reasonable setting for monetary policy," he argued, agreeing that May was the likely month for a first cut. 

The RBA has underestimated NAIRU for the best part of a decade, contributing to policy settings that have generally been tighter than necessary, particularly in the years before the pandemic, Pickering said.

However, Morley pushed back against concerns on productivity growth, noting weakness would not be enough for the RBA to continue holding, particularly if it was more concerned than it has so far indicated about demand, whose weakness would begin to show in the labour market. “If the data really starts to come in much weaker on the real side of the economy and there's no upward surprises in terms of the slow path of getting inflation back to target, they're revealing that they would cut rates in response to that,” he said, pointing to the RBA's dovish communications this week. 

The Board will next meet Feb 17-18.