Bullock Brings Good Tidings

The RBA left rates on hold for the ninth-straight meeting.

Since November, the RBA has gone from needing confidence that inflationary pressures are easing to growing in confidence that they are. This is a big revelation!

The Board has finally signalled that it is now starting to lean towards cutting rates. As recently as August, the Board seemed more inclined to raise rates.

However, they still need further assurance from data through to the first few months of 2025 before they are firmly convinced and are willing to cut rates from their current restrictive stance. Hopefully, this Christmas cheer can last through the scorching Australian summer.

What the RBA’s Statement said

“The Board is gaining some confidence that inflationary pressures are declining …”

“While underlying inflation is still high, other recent data on economic activity have been mixed, but on balance softer than expected in November.”

“Growth in output has been weak. National accounts for the September quarter show that the economy grew by only 0.8 per cent over the past year. Outside of the COVID-19 pandemic, this is the slowest pace of growth since the early 1990s.”

“Wage pressures have eased more than expected in the November SMP.”

“September quarter data suggest that both incomes and consumption had recovered a little slower than forecast, but more recent information has suggested a pick-up in consumption in October and November. There is a risk that any pick-up in consumption is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market."

Statement by the Reserve Bank Board: Monetary Policy Decision, 10 December 2024.

https://www.rba.gov.au/media-releases/2024/mr-24-27.html

What the governor said at the press conference

“With inflation coming down and employment growing, we think we remain on the narrow path”.

“Recent economic data have been mixed and some indicators are softening in line with our forecasts. That said, on balance, some data are a little softer than expected. This has given the Board some confidence that inflationary pressures are declining but risks remain.” 

“The Board will be looking to the data over the next month or so to see if the economy and inflation continue to evolve as expected.”

“... we need to see more progress on underlying inflation coming down.”

“The Board wanted to give the message that they noticed some of the data is a bit softer..., so the Board wanted to convey that their opinions and views are evolving and are evolving as the data evolves.”

“The private sector is very weak and the public sector is filling a gap there. With that configuration, we see, our forecasts see inflation coming back down.”

Behind the RBA’s Christmas cheer

So what is the reason for the change in outlook from Michele Bullock and the Board? The short answer is that recent economic data are in line with RBA forecasts, with a little extra softness thrown in for good measure. The inflation train is running ahead of schedule and fears over upside surprises have eased. Bullock can put her feet up at Christmas.

Inflation is falling as expected

Quarterly inflation fell from 3.8% in June to 2.8% in September in annual terms. More recently, monthly inflation fell to 2.1% in September and remained at 2.1% in October. Headline inflation thus looks well on track to meet or fall below the RBA’s November SMP forecast of 2.6% for the December quarter.

The RBA’s preferred CPI measure, the trimmed mean, is higher than headline CPI and has also been more volatile. However, overall it has been trending down and was 3.5% in the September quarter and 3.5% in the month of October. This is close to the RBA’s forecast of 3.4% for the December quarter (see chart below).

Going forward, the RBA expects inflation to continue to fall through to mid-2025 as public demand falls and the labour market eases. This is even after factoring in the impact of the government electricity rebates.

Consumer demand is slower than expected

The RBA is expecting consumer demand to increase in late 2024 and into 2025 as real income starts to recover. This increase in consumer demand will push inflation up a little higher in late 2025 but its subsequent moderation will help push inflation down into the target band late in 2026.

However, recent data suggests that consumer demand is taking longer to recover than expected and thus we may not see it push inflation up as much as the RBA expected in 2025. 

This can be clearly seen in the GDP result for the September quarter. The overall result of 0.8% in annual growth was slightly below consensus but is well below the RBA’s 1.7% forecast for the December quarter.

The reason behind the slower than expected growth is that while public demand remains strong (4.7% in annual terms) household consumption is yet to begin its forecasted recovery.

Final household consumption was flat for the quarter and just 0.4% in annual terms for the second month in a row (see chart below). In contrast, the RBA is forecasting 1% for the December quarter and 2% for the June 2025 quarter.

Monthly retail turnover and household spending have perked up in October, but it remains to be seen if this will be sustained or was the result of earlier than normal discounting by retailers. Black Friday gets earlier every year.

Wage growth slower than expected

On top of the slower than expected growth and household consumption, wage growth slowed by more than the RBA expected in the September quarter. The WPI (Wage Price Index) fell from 4.1% in the June quarter to 3.5% in the September quarter (see chart below). The RBA is expecting a result of 3.4% in December. If WPI continues to fall at similar pace, the December figure could be below 3.4%.

Australian Private Debt Market

Bullock is suggesting that the RBA may be a little ahead of schedule. However, underlying inflation is still high, and the outlook remains uncertain. Australian private debt is therefore expected to continue to be attractive relative to other developed markets.