Following today’s inflation data for the September quarter, we affirm our call for the Reserve Bank Board to leave the cash rate unchanged at its meeting next week. We continue to expect rates to remain unchanged this year, and that the rate-cutting phase will begin with a 25 basis point cut at the February 2025 meeting.

Headline inflation dropped into the RBA’s target range. As flagged by Westpac Economics colleague, Senior Economist Justin Smirk, there were downside risks to our expectations of headline, and indeed these were realised: headline inflation came in slightly below consensus and our own expectations (0.2%qoq, 2.8%yr). A number of key categories of essentials expenditure came in below our expectations, though some key services components were a little higher than we expected, too.

The all-important trimmed mean measure came in on consensus at 0.8% qoq, and 3.5%yr. Both measures are significantly down from the prior quarterly readings, and the quarterly outcome (0.78% to two decimal places) was just a few basis points above our nowcast. Trend inflation is still above target, but the disinflation remains on track. Although the RBA does not publish a forecast for the September quarter, we think that today’s outcome would have been in line with their expectations

We also note that revisions to output, hours worked and productivity data in the annual national accounts further reduce potential concerns about ongoing inflation in the domestic cost base.

All of this suggests that risks of a further rate hike have faded, but neither do recent data imply that rate cuts need to be brought forward from our current expectations. Given the uncertainties surrounding the US election and its aftermath, we think it likely that the RBA will stand pat this time and see how global events play out. Thus the view that rate cuts will commence in February remains appropriate.

Things to watch for in the SMP and media conference

The November RBA meeting announcement will be accompanied by a new issue of the Statement on Monetary Policy and revised forecasts, as well as the media conference. Within that body of communication, there are several things to watch out for.

Will the RBA hold onto the ‘not ruling anything in or out’ language?

The further down the disinflation path we travel, and the longer the disinflation remains on track, the harder this language is to justify, even with broader financial conditions supposedly easing. At some point, the RBA will need to acknowledge that we are getting closer to the point that rates will start falling. Perhaps revised forecasts at this meeting will be the trigger, or the decline in wages growth that will be released ahead of the next meeting.

How will the RBA revise its assessment of the level of supply, and so spare capacity, in light of recent data revisions?

As Westpac Economics colleague, Senior Economist Pat Bustamante revealed earlier today, revisions to data in the annual national accounts substantially ameliorate concerns about supply capacity and productivity. The RBA walked back in September some of the concerns it expressed in August. It is worth watching how the RBA’s language around this issue evolves from here.

How will the RBA integrate views about energy prices into its forecasts for inflation in 2025 and beyond?

Currently the RBA is ‘looking through’ the substantial effects of rebates on the headline CPI data and focusing on underlying measures such as trimmed mean. But when the tables turn in late 2025 and headline is printing above 3% while trimmed mean declines below 3%, will the RBA continue to focus on trimmed mean, or start calling out the deviation from target on a headline basis?

How will the RBA’s assessment of upside risks from household spending and the housing market shift?

With a few more months of data, the spending response to the Stage 3 tax cut is still looking quite modest. (See Westpac Economics’ Jameson Coombs’ reporting on the Westpac-DataX Consumer Panel last week.) Meanwhile housing prices in Sydney are starting to turn, joining Melbourne as a market that is no longer increasing significantly. Future rate cuts could turn this around, but it no longer seems that wealth effects pose a material upside risk to spending.

What would it take for the RBA to cut in December?

Inflation is declining largely as hoped for, and peer economies are not only cutting rates but front-loading the adjustment. The question therefore arises: why wouldn’t the RBA just get on with it and start cutting sooner?

Another way to frame this question, though, is: what would it take for the Governor to go back on her earlier statement that rate cuts this year did not align with the Board’s thinking?

We think that the bar is still too high for the RBA to go back on its earlier view. The labour market remains resilient – though we are mindful that employment growth has to run hard just to keep pace with strong population growth and the trend rise in participation. And while the spending response to the tax cuts looks to be less than expected, it is not zero. So, absent a major shock, we do not see the economy hitting a wall in the next few months, enough to shift the RBA’s thinking on the timing of rate cuts. If things turn out weaker over the next couple of quarters, a faster trajectory for the rate-cutting phase could occur. But a start date earlier than February seems like a low-probability outcome.