RBA likely to move in early 2025
Australian inflation is heading in the right direction, with the annualised rate at 2.8%. However, all eyes are on the trimmed mean which the RBA prefers to watch, currently at 0.8% for the quarter. We think this will continue to trend lower and the monthly indicator will show a declining rate.
Inflation is no longer the problem it was last year. The only question is, how big of a roll will government play. We're seen the direct impact of energy subsidies, worth around $3bn, helping bring down the inflation rate.
So far the energy subsidy is temporary, but could materialise as an ongoing measure because it's working, and we're heading into an election year. The government doesn't have many triumphs to point to, this is one of them.
The other question is the size of the public service, which has swelled since the pandemic and remains a key strength behind the employment market. Again, we don't see the government shedding jobs going into an election year.
Bottom line: For the above two reasons, we think the RBA would rather move later than early because its rationale will be that it has capacity to cut when needed. Waiting until March next year will be too little, too late. But given the RBA's past performance, we think it's the most likely action.
Markets will start to price in a March cut, with December a 50/50 chance only if jobs deteriorate and inflation falls further.
Peter Esho is an economist and Founder of Esho Capital. He has 20 years of experience in investments and markets.