As expected, the RBA kept the cash rate on hold at 4.35% following its November meeting. The Board acknowledged that headline inflation has fallen substantially but emphasised that measures of underlying inflation were still too high. In addition, quarterly outcomes on trimmed mean inflation are declining only slowly. So while the disinflation remains on track and policy is restrictive, the Board does not yet have enough confidence in this to start contemplating a rate cut. The media release retained the language on remaining vigilant to upside inflation risks and not ruling anything in or out. Risks were characterised as balanced but, because underlying inflation is above the target, the RBA Board is more attentive to the upside risks.

Underlying inflation was characterised as being consistent with forecasts, even though trimmed forecasts edged down a little from the August round. The end-2026 forecast is now firmly at 2.5%, the midpoint of the band, rather than 2.6% as previously expected. Forecasts of Wage Price Index growth were also scaled back, and by a bit more than the reduction in the forecast profile for trimmed mean inflation. On the other hand, the RBA’s view of the labour market has shifted to be a little more bullish, partly because of their pessimism about productivity.

The headline inflation forecasts have been revised to reflect the impact of electricity rebates and cost of living measures. This adds some volatility to the profile, which is why the RBA is highlighting trimmed mean inflation as a guide to underlying momentum. The RBA’s inflation forecasts assume that the cost-of-living assistance expires as currently planned. Given ongoing cost of living pressures, though, a further extension of these measures or introduction of similar measures cannot be ruled out.

While there were some elements of the RBA’s analysis that seems a little hawkish compared with our own view of the data, we do not see anything in today’s decision or discussion that would change our view that the cash rate will start declining slowly from February, but no earlier than that. In the press conference, the Governor declined to give any guidance on the outlook for the cash rate for the first half of 2025. This contrasts with the language in August, where a near-term cut was ruled out. We suspect that the RBA believes that it will not start cutting until later in 2025, but this view could evolve if inflation continues to come in consistent with or below current forecasts.

Mixed picture on the domestic economy

Consumer spending has been weaker than the RBA expected and the pick-up in response to the Stage 3 tax cuts has also been smaller than expected. The RBA now expects real consumption to be flat in the September quarter.

In contrast, the RBA’s view of labour market developments has shifted in a more hawkish direction. The media release and SMP characterised the labour market as still being tighter than full employment. This is despite growth rates of wages and labour costs already easing, which ordinarily would imply that there is some labour market slack. A few indicators, including average hours worked and the NAB survey measure of labour availability, have stopped easing, and the RBA has taken some signal from this.

In the August SMP, the RBA revised its estimate of full employment down (in other words, revised up its estimate of the sustainable rate of unemployment). Although inflation has broadly tracked its forecasts from a year ago, the RBA reassessed its view of full employment following higher inflation outcomes than expected ‘more broadly over the past two years’. While this seems rather backward-looking, in its annual review of its forecasts, published each November in the SMP, the RBA highlighted that weaker GDP outcomes recently alongside inflation and unemployment outcomes that were broadly as expected implied that supply capacity was lower. The RBA now estimates the unemployment rate consistent with full employment (the NAIRU) as being centred on 4½%, a little higher than it thought a few years ago. While higher labour force participation implies that labour supply is higher than otherwise, the SMP attributed some of this to cyclical factors relating the cost-of-living pressures and the ready availability of jobs.

The forecast review also acknowledged a point highlighted in some of our past notes, that the softness in measured productivity partly reflects a reallocation of activity towards the (lower productivity) non-market sectors. However, the RBA also pointed to a range of industries seeing weaker than average growth in productivity over the past year, including some in the market sector. These issues have prompted internal RBA discussions about underlying trends in productivity globally. So far, though, the discussion has been mostly statistically focused rather than identifying underlying causes, though this work is planned for the future. Some of the messages from the RBA’s liaison, of firms focusing on productivity and cost containment, are relevant here.

The RBA has also developed a new focus on the fact that Australia’s labour market appears tighter than some peers. This seems less surprising when one considers that Australia was a bit later to see inflation pick up and peak, having been later to open up after the pandemic than a number of these peers. Recall also that holding onto more of the labour market gains was the RBA’s deliberate strategy and the reason why it chose the ‘not quite as high for a bit longer’ strategy in the first place – an objective that the Governor again highlighted in the media conference after the announcement.

That said, the risks highlighted in the Outlook section of the November SMP no longer include the risk highlighted in August that supply capacity could be even weaker than assumed, suggesting the staff are comfortable with their current estimates of supply capacity. Instead, a new risk around future weak labour productivity growth was added. The consumption risk remained two-sided but was broadened to be about private sector demand more broadly. Global risks were likewise assessed to be two-sided; one of these, the US elections, will become a known outcome this week, although the broader implications of the result will depend on how much of their agenda the successful candidate can get through Congress.