RBA Preview: Forecasts from eight major banks, tightening cycle over but rate cuts are not coming just yet

We expect the post meeting statement to acknowledge the broader slowdown now evident across the economy since the December Board meeting. Similarly, the RBA will acknowledge the lower-than-expected Q4 CPI outturn. When it comes to the stance of policy, however, the RBA will likely lag the turn evident in the economy. In our view, the RBA will want to be very confident that inflation is coming back to the band in a sustainable fashion before changing its rhetoric. As a result, we expect the post meeting statement to contain a tightening bias. In the SoMP, we expect downward revisions to GDP and inflation forecasts with the June 2026 inflation forecast to be around the mid-point of the target band. We suspect the press conference might aim to communicate to the public more than the market. That and its likely free-flowing nature suggests there may be less information content for markets in the press conference versus the other communication elements on Tuesday.

We expect the RBA to keep rates unchanged at 4.35% at its first meeting of the year. We think recent CPI prints may allow some breathing room for the RBA to wait and see. November CPI inflation eased to 4.3% YoY from 4.9%. That said, services CPI remains sticky at 4.7%, though lower than 5% earlier. Similarly, the labour market softened slightly (unemployment rate picked up to 3.9% in December), albeit remaining at tight levels.

The RBA will keep the cash rate on hold and it is unlikely to raise rates further this cycle.

We expect the RBA to leave the cash rate on hold at 4.35% and expect to endorse an ‘on hold for longer’ policy stance rather than entertaining the possibility of earlier rate cuts. While the Q4 CPI report shows that the RBA is making good progress on its inflation battle, the underlying details suggest stickier domestic price pressures and the RBA may be wary of making an abrupt shift of signalling a rate cut this early in the year. We expect the Bank to cut in August and a trimmed mean inflation forecast at 3% in Q4’24, 2 quarters ahead compared to their Nov forecasts, bolstering our view for a cut. Unless the RBA predicts a sharp rise in the unemployment rate in the forecasts, we doubt the possibility of an earlier cut before August.

There is virtually no prospect of any change.  Cash rate futures are now pricing in a more than 50% chance of easing by May, helped by recent inflation data. However, we think that the inflation picture is less impressive than it appears, and is largely base effect-driven, while monthly run rates remain high. We expect inflation to start heading higher over January and February, which may lead to some pull back – much like we have seen in the US. The RBA may use the opportunity to push back a bit at market pricing, which could speed this adjustment along.

The RBA will probably stay on hold, but we believe the policymakers will not remove the tightening bias in the statement.

The RBA is expected to keep the cash rate unchanged at 4.35%, which represents the peak of the hiking cycle. The main focus of the new forecasts will be when the RBA expects inflation to drop back into its 2%-3% target band, following weaker-than-expected inflation in Q4. Crucially, the RBA is unlikely to make a dovish pivot and signal rate cuts anytime soon. Instead, we expect a 25 bps rate cut in Q3 followed by 25 bps in Q4 for a year-end cash rate of 3.85%.

We suspect policymakers will opt to hold rates steady at 4.35% for a second consecutive meeting. Although the RBA's December announcement left the door open for further rate hikes, our view is that the RBA's tightening cycle is over although we do not think rate cuts are coming just yet. For now, inflation and wage growth are likely at levels still too high to be consistent with the 2%-3% inflation target. As a result, we do not forecast an initial rate cut until Q3 of this year.