In wait-and-see mode – Standard Chartered

The RBA to hold the cash rate at 3.60% at the 30 September meeting. The RBA is likely to wait for the quarterly CPI print before adjusting the cash rate. Markets expect a cut in Q4, but the upside CPI surprise in August raises the risk of an on-hold stance, Standard Chartered’s FX and Macro Strategist Nicholas Chia reports.

Shifting sands

“We maintain our view that the Reserve Bank of Australia (RBA) will keep the cash rate unchanged at 3.60% at its 30 September meeting, which will not be accompanied by updated economic forecasts. Recent economic data has surprised to the upside – August headline CPI inflation came in at 3.0% y/y (versus 2.8% in July and Bloomberg consensus of 2.9%), while trimmed mean inflation eased to 2.6% from 2.7% y/y. Household spending remains robust, despite a lukewarm labour market report in August. We think RBA Governor Michelle Bullock is likely to reiterate the importance of the quarterly CPI print as an input to any further policy rate adjustments.”

“Freedom of information disclosures from the RBA suggest that the neutral rate was likely around 2.90% in mid-2024, down 70bps from its previous estimate of 3.60%. While this implies that policy rates are moderately restrictive, we doubt that Governor Bullock will refer specifically to the neutral rate in setting policy rates. At previous meetings, she has preferred to gauge the neutral rate based on how the labour market and CPI have behaved in response to rate cuts. There is some uncertainty over the Non-Accelerating Inflation Rate of Unemployment (NAIRU), which was revised up to 4.83% in Q1 from 4.69% at end-2024; a separate study using various labour indicators pegged the NAIRU estimate at 4.3-4.4%. The actual unemployment rate stood at 4.2% in August.”

“Our baseline view is still that the RBA will deliver one more 25bps cut in Q4, to a terminal cash rate of 3.35%. However, the upside surprise from August CPI, alongside a firming economic recovery, raises the risk of a rate pause in Q4. The Q3 quarterly CPI print, due for release on 29 October, is likely to influence future RBA rate decisions.”