Cliff Notes: not out of the inflation woods just yet
Key insights from the week that was.
As expected, the RBA delivered a 25bp rate cut on Tuesday, bringing the cash rate down to 4.10%. While the Board cited “welcome progress on inflation” as a determinant of the decision, communications were hawkish overall. In particular, the decision statement highlighted the Board’s caution over easing policy “too much too soon”. In the subsequent press conference, Governor Bullock also made an effort to temper expectations, referring to market pricing for another three rate cuts as “far too confident” and “unrealistic”. This path, taken as an assumption for the RBA’s latest forecasts, ultimately sees trimmed mean inflation hold above the mid-point of the target range through to June 2027. Deputy Governor Hauser reiterated these points in an appearance with Bloomberg later in the week, but added that, in a forecast scenario where the cash rate remained unchanged, trimmed mean inflation would instead be projected to undershoot the mid-point of the target range.
Chief Economist Luci Ellis also took time this week to outline the RBA’s perspective on the labour market and its significance for policy. In short, the RBA now anticipates the unemployment rate will hold at 4.2% until June 2027, below the Bank’s current NAIRU estimate of around 4.5%, resulting in annual nominal wages growth between 3.0% and 3.5% over the forecast horizon. With weak productivity, wage growth at this rate is seen as a material risk to inflation holding sustainably at the mid-point of the target range.
We also received updates on wages growth and the labour market. The former came in a touch softer than expected in Q4 at 0.7% as the latter showcased strong growth in employment, trends evident over the past six months. While assessing the true degree of tightness in the labour market in real time is very difficult, we continue to believe, on balance, that the upside risks posed to inflation by the labour market are not as significant as implied by the RBA’s baseline forecasts. We remain of the view therefore that three more rate cuts will be delivered over the next three quarters to a terminal rate of 3.35%. Before the House of Representative Standing Committee on Economics this morning, the Governor and senior staff kept the focus on the key themes above.
Across in New Zealand, the RBNZ announced another 50bp cut, taking cumulative easing to date to 175bps. A further 50bps of easing is expected in coming months, but this should trigger a robust growth recovery through 2025 and 2026. The decision and updated forecasts of the RBNZ are discussed in depth by our New Zealand Economics team in their bulletin.
Further afield, in the US, the January FOMC meeting minutes emphasised that, with appropriate monetary policy, the Committee continue to believe inflation will decelerate to target and the labour market remain balanced. Still, potential changes to US trade and immigration policy means the risks to this baseline view are high. Many participants therefore "emphasized that additional evidence of continued disinflation would be needed to support the view that inflation was returning sustainably to 2 percent". A few also noted "the federal funds rate may not be far above its neutral level", an additional reason for caution.
It will be some time before the new administration's policies are fully known, let alone the implications understood, so these risks are likely to persist. Making this clear, while at Mar-a-Lago, President Donald Trump announced he will impose a tariff on imports of automobiles, pharmaceuticals and semiconductors on 2 April at an initial rate of "25%... and it'll go substantially higher over a course of a year". Reports suggests these tariffs would be in addition to country tariffs already announced.
Canada’s CPI meanwhile accelerated to 1.9%yr in January, reintroducing risks around inflation. The acceleration of median and trimmed mean inflation to 2.7%yr could imply there are underlying pressures. Despite considerable slack in the economy, a pickup in price pressures may require the Bank of Canada to shift their focus from supporting growth to restraining inflation.
Across the pond, UK data pointed to inflation risks remaining present, justifying the Bank of England's 'gradual' approach to monetary easing. Wages (ex. bonus) accelerated to 5.9%yr for December 2024, in line with expectations. This comes despite softer labour market conditions as reported by the ONS. Official LFS data showed a 107k gain in employment, and the official three-month unemployment rate remained unchanged at 4.4%. While it is uncertain how these risks will evolve, one silver-lining comes from the Decision Maker Panel survey which showed that businesses' wage expectations are starting to tick down, and that they are most likely to compress profit margins in response to the increase in the National Insurance contributions rather than raise prices or reduce labour demand. This would help to contain risks to services inflation from wage growth. The BoE also had the January CPI to digest, down 0.1%mth but with base effects lifting the annual figure to 3.0%. A reacceleration in headline inflation was expected by the BoE and is unlikely to prompt a change of approach to policy.
Finally to Japan where Q4 GDP surprised on the upside, rising 2.8%qtr annualised against a consensus expectation of 1.1%qtr. Much of the growth came from an improved trade position – exports rose 1.1%qtr, likely reflecting activity front running tariff risks, while imports decreased 2.1%. There was also a notable 0.5% gain in private investment. Household consumption meanwhile rose 0.1%qtr, leaving it, in level terms, below the recent peak of Q1 2023 and immediately prior to COVID. While data is moving in the right direction, caution is still warranted. Consumer confidence is necessary to sustain a recovery in consumer demand in real terms and justify further rate hikes by the BoJ.
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