No April fooling for RBA – rates on hold this meeting
The RBA was too hawkish in its rhetoric last month to consider a cut at this meeting. The labour market, wages, consumption and trimmed mean inflation are all crucial for the path beyond that.
We are sufficiently confident that the RBA will keep rates on hold on 1 April that I will be writing my post-meeting note from London. We do not expect any surprises from the RBA this meeting that would require spending the early hours of the London morning trying to work out what is going on. While we still expect a rate cut in May, back-to-back cuts in February and April were never on the table. The RBA was too hawkish in its rhetoric last month for that, and the Board made clear that last month’s cut did not foreshadow more. Cutting again at the April meeting would therefore be damaging to its credibility.
Recall that the RBA’s February forecast round implied no further decline in trimmed mean inflation from here – flat at 2.7%, the same annualised rate achieved in the second half of 2024. This was predicated on a market path for the cash rate with roughly 90bps of policy easing over this year. In order to get inflation all the way back to the 2.5% midpoint of the target range, the RBA expects to need to cut by less than this. If things start turning out in line with this narrative, with inflation stuck at current rates and wages growth holding up in the near term, then it would be reasonable to expect the RBA to cut at most once more this year.
Our own view of the outlook is not wildly different, with trimmed mean inflation cycling around the desired level of 2.5%, just 0.2ppts below the RBA’s forecasts. We also expect a small lift in the unemployment rate, to 4.5% compared with the RBA’s 4.2% forecast, which is barely above the current level of 4.1%. (It is worth noting that Treasury’s Budget forecasts also have unemployment staying at 4¼% out to 2026/27.) However, our forecasts diverge enough to have different policy implications. If our forecasts are broadly correct, then the RBA is likely to cut three more times this year, bringing the cash rate to 3.35%.
Since the February meeting, the data flow has been in line with, or a little softer than the RBA’s forecasts. The monthly inflation indicator has been consistent with trimmed mean inflation at or below the RBA’s expectations. The headline CPI indicator outcome for February was essentially as expected, flat in the month and 2.4%yr (versus 2.5%yr expected, with the difference coming from some small revisions to past data and rounding). The monthly trimmed mean ticked down to 2.7%, suggesting we are on track to see the annual pace of the quarterly trimmed mean CPI series hit 2.7% in the March quarter. Pleasingly, inflation in the stickier housing-related and financial services components continues to unwind.
The labour market was a bit mixed in February, with both employment and participation stepping down. And population growth slowed a bit more sharply than we had expected, which points to both demand and labour supply being lower than assumed, and less housing-related inflationary pressure. (The Budget forecasts did not incorporate the latest information on the labour market or population.)
Other developments since the February RBA meeting include the breaking of the ‘US exceptionalism’ narrative, along with the associated market sell-off (now partially reversed) and decline in US consumer confidence. The downside risks to global growth from the US-instigated trade war are also a concern, though Treasury modelling in yesterday’s Budget suggests the implications for the Australian economy are modest.
The federal government’s announcement of a six-month extension to the electricity rebates pushes out the timing of the bounce-back in CPI inflation. The RBA will look through this and continue to focus on trimmed mean inflation. The other tax and spending measures were modest enough that they will not affect the RBA’s view of the outlook materially, even though market pricing did shift a bit on the night.
We therefore think that the April meeting will prove to be something of a ‘dead rubber’. Even so, there are some things to watch for in the post-meeting statement. Along with any update to the outlook for inflation, we look for any commentary on the outlook for wages; as best as we can tell, wages growth would actually have to pick up from here to meet the RBA’s near-term forecasts for Wage Price Index growth. We think this is unlikely and will be watching for how the RBA characterises developments here.
Likewise, we look for more discussion about the consumption outlook. Recent timely data have been a bit mixed, and the RBA’s outlook for consumption growth in calendar 2025 is notably above consensus, even after the slight downward revision in the February SMP. While Assistant Governor Hunter noted in a recent speech that spending has indeed picked up for goods and services less affected by Black Friday and other sales periods, nobody was suggesting otherwise. The real risk around the consumption outlook is that the lift in spending in response to the Stage 3 tax cuts, while positive, is less than historical experience would lead one to expect. That is the message of our own Westpac–DataX Consumer Panel, which points to only about 25 cents in every dollar of extra disposable income being spent, which is on the low side of earlier expectations.
Looking forward to May, the inflation data will once again be crucial. So much is hanging on that difference between 2.7% and 2.5% that even a small downside surprise for the RBA on trimmed mean inflation in the March quarter will cement our current view on the timing and scale of further cuts.
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