VIEW: RBA On Hold As Inflation Moderates & Growth Slows

Westpac sees today’s lower-than-expected Q4 CPI report as the piece that “seals the deal” for an on hold RBA on February 6 and that its hiking cycle is likely over. It expects that the first rate cut will likely be in September.

• “Inflation in the December quarter was a little below Westpac’s expectations and noticeably below the RBA’s November 2023 forecast. Taken together with the run of soft data since the December Board meeting, we expect the RBA to keep the cash rate on hold next week, and to stay at 4.35% until it is confident that inflation will return to the 2–3% target range by end-2025. They are likely to reach this point later this year; we continue to expect September as the mostly likely date for the initial rate cut in this cycle.”
• “Domestic inflation is now clearly coming down. Market services inflation has dropped significantly. The monthly CPI indicator for December was distorted by base effects involving holiday travel, but measures excluding this are now running in the low 4% range and clearly heading down.”
• “In articulating their decision, the Board will have the advantage that the Bank’s forecast horizon will roll forward to mid-2026 this round. It is therefore entirely possible that the staff forecasts can now be shown with inflation ending the period at 2½%, the midpoint of the 2–3% target range.”