Central Bank stands pat but turns dovish in December

Bank delivers widely expected hold: At its meeting on 9–10 December, the Reserve Bank of Australia (RBA) decided to leave the official cash rate (OCR) unchanged at 4.35%, meeting market expectations and marking the ninth consecutive hold since late 2023. Moreover, the Bank kept the interest rate on exchange settlement balances at 4.25%.

Sticky inflation, strong labor market and uncertain outlook motivate decision: In holding instead of cutting, the RBA was again motivated by sticky inflation. The Bank reiterated that it does not expect inflation to sustainably return to the midpoint of the 2.0–3.0% target band before 2026, noting that core inflation remains entrenched above the target range. The hold was further motivated by signs of a persistently strong labor market, as shown by a nearly record-high participation rate and strong employment growth. Moreover, the RBA highlighted that the outlook remains uncertain, particularly due to heightened geopolitical tensions; in a subsequent press release, Deputy Governor Andrew Hauser addressed the prospect of rising U.S. tariffs under President-elect Trump, stating that “the impact on Australian inflation is ambiguous” and that the Bank would adjust in line with its mandate and “in either direction, with force if needed”.

Easing expected in February: In its communiqué, the RBA struck a more dovish tone than in previous meetings, noting that upside risks to the inflation outlook have eased and that it has gained some confidence that inflation is declining in line with its forecasts. In addition, the economy is slowing, having expanded at the softest annual clip since the early 1990s in Q3, barring 2020’s pandemic-induced downturn. As a result, the vast majority of our panelists expect the RBA to begin cutting rates at its 17–18 February 2025 meeting; our Consensus is for a 25 basis point cut. Our panelists then expect slightly over 50 basis points of further reductions by end-2025. That said, faster-than-expected core inflation is an upside risk.

Panelist insight: Nomura’s David Seif and Andrew Ticehurst commented: “While we expected some dovish shift in terms of the macro (growth/inflation) comments today, we judge that we received even more than we were looking for. […] The market is now pricing around 16bp of easing in February, broadly in line with our judgment that the probability of a February cut is ~60%. It is also pricing ~30bp for April, ~50bp by May and ~72bp by August, also close to our forecasts.” ING’s Deepali Bhargava said: “We maintain our call for a rate cut in the first quarter of next year, but it remains an "at the earliest" view, and there is certainly scope for this to be pushed back especially if the consumption data improves over the next few months.”

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