Target By End 2025 But Path “Unlikely To Be Smooth”, Rates On Hold For Now

The RBA left rates at 4.35% which was widely expected and maintained its neutral bias with the optionality that it isn’t “ruling anything in or out”. In that respect there was little change but the tone of the statement was a lot more cautious re the inflation outlook saying that not only is it “falling more gradually than expected” but the Board “will remain vigilant to upside risks”. The statement with the updated forecasts implies that rates are on hold for at least this year given the current outlook.

• 2024 headline inflation was revised up substantially with Q2 up 0.5pp to 3.8% and Q4 +0.6pp also to 3.8% but the oil price assumption was also higher. While it will not be near the top of the band at the end of this year, the RBA continues to project 2.8% in Q4 2025 and 2.6% in Q2 2026, so no change in when inflation enters the band and reaches the mid-point but the “process” is “unlikely to be smooth”. This also means no reason to change rates in either direction.
• Trimmed mean was revised up 0.2pp to 3.8% in Q2 2024 and 0.3pp to 3.4% in Q4.
• The RBA uses market pricing and professional forecasters for its OCR assumption. Rates are little changed until H2 2025, which implies that they need to stay around 4.35% in order for inflation to return to target by Q4 2025. While there is significant uncertainty especially the further out years, current circumstances suggest that rates may not be cut until H2 2025, which would be after the Federal election due by May 2025.
• Growth was revised down 0.5pp to 1.3% in Q2 2024 driven by private domestic demand, while public demand was revised up. The rest of the horizon was little changed. The unemployment rate was revised down.
• A few changes of note include that supply and demand are not in balance but “somewhat closer”, services prices are expected “to ease more slowly than previously forecast”, and wages are now unsustainably high given “trend productivity growth”.
• See statement here.