Market Musings: RBA: Moving closer to rate cuts
As widely anticipated the RBA held interest rates steady at 4.35% once again at today’s meeting, the final one for 2024. This is where policy has been since November 2023. However, some adjustments to the RBA’s guidance do suggest the door to interest rate relief starting to be delivered in H1 2025 has opened a bit further. Prior rhetoric that the Board “is not ruling anything in or out” has been jettisoned, as was the comment that policy “will need to be sufficiently restrictive” until there is confidence inflation is heading sustainably towards target. Instead, the RBA notes that while core inflation “remains too high”, the run of recent data such as wages, incomes, and consumption mean “the Board is gaining some confidence” price pressures are on the right track and that “some upside” risks “have eased”.
The tweaks in the RBA’s commentary shouldn’t be that much of a surprise as further interest rate hikes weren't really on the table based on how the broader economy (especially the private sector) is travelling and the shift in the balance of risks. That said, it also doesn’t necessarily mean a steady stream of interest rate cuts is imminent. As RBA Governor Bullock outlined the data will be in the driver’s seat with a quarterly CPI report, a couple of labour market readings, more information on domestic and global growth, and geopolitical events due before the RBA next meets on 18 February 2025. In our opinion, each meeting in H1 should be considered ‘live’ for a change, but as things stand, we continue to believe the RBA’s first step is probably most likely to be taken in May. An earlier kick off (i.e. February) is a rising chance particularly if cracks in the Australian labour market emerge and/or core inflation decelerates sharply.
A recalibration lower of interest rates is a matter of time, and has always been part of our thinking. Odds of a move by the RBA in February have risen to ~65%, with 3 interest rate reductions now fully discounted by September. However, FX is a relative price, and the RBA’s trajectory remains quite different from many other central banks. We think the RBA’s lower starting point, the resilient labour market, still high level of activity across the economy, sticky services inflation, and flowing fiscal/income support mean that the RBA will lag its peers in terms of how far it moves during the easing cycle.
As the dust settles we expect the AUD, which has come under some renewed downward pressure in the wake of the RBA’s wording change (now ~$0.6395) to level off. Medium-term we still feel the AUD should claw back lost ground and rebound against currencies such as the EUR, CAD, CNH, and NZD due to Australia’s more favourable fundamentals. Against the USD, as mentioned previously, the policy agenda of US President-elect Trump is projected to be USD supportive and this looks set to keep the AUD trapped in the mid-$0.60s over H1 2025 ( see Market Musings: Trump 2.0 & the AUD). But digging deeper, although the firmer USD impulses may act as an AUD ceiling, we don’t foresee it falling much further from already low levels. In our judgement, a decent amount of ‘negativity’ looks priced with the AUD trading at a ~3-4 cent discount to our suite of ‘fair value’ models. Moreover, over the past decade the AUD has not traded sustainably below where it is (it has only been sub-$0.64 ~3% of the time since 2015) because of Australia’s elevated terms of trade and capital flow trends. News China is looking to unveil more stimulus measures to reinvigorate its economy, coupled with Australia’s rather tariff-insulated export basket due to limited domestic manufacturing, can keep these factors in place. At the same time, the positive swing in Australia’s net international investment position over recent years also suggests it could continue to be less sensitive to bouts of market turbulence than it was in the past.
Peter Dragicevich
Currency Strategist - APAC
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