The RBA interest rate setting committee is meeting today and tomorrow and most economists and the market expect the cash rate to be cut by 25bps to 4.10% but with an accompanying message from RBA Governor Gillian Bullock indicating uncertainty about when another cut may come. A rate cut accompanied by a hawkish message implies the RBA is cutting even though it shouldn’t. The RBA will also release its latest economic forecasts in the quarterly Monetary Policy Statement tomorrow and we expect upward revisions to forecast labour market tightness and probably wage growth through 2025 that imply getting inflation down consistently inside 2-3% target band is still at least as lengthy and sticky a problem as it was when the RBA produced the last set of economic forecasts back in November.
The revisions to the RBA’s economic forecasts relating to labour market tightness that we expect to see are higher annual employment growth in mid and late 2025 and lower unemployment in both those periods too. Those revisions we expect for the RBA’s employment growth and the unemployment rate would also mean that their wage growth forecasts will need upward revision as well.
Going back to November and the last set of economic forecasts from the RBA annual employment growth at the end of 2024 – the starting point for considering what happens in 2025 – was much stronger than the RBA had forecast, up 3.1% y-o-y against the RBA forecast of 2.6%. The unemployment rate at the end of 2024 was also much lower than the RBA’s forecast of 4.3% at 4.0%. Wage growth at the end of 2024 is due to be released this week and the RBA may be close to its forecast 3.4% y-o-y, but mostly because of delays agreeing multi-year Enterprise Bargains for many State Government employees in health, policing and transport sectors that will come with big pay increases over three years when settled this year.
The strong end-2024 starting point for producing 2025 labour market forecasts, together with signs that Australian domestic demand growth accelerated late last year indicate that the RBA needs to revise upwards the annual employment growth forecasts produced in November of respectively 2.2% y-o-y and 1.4% for June 2025 and December 2025 and realistically by at least 0.5 percentage point in both cases.
Upward revision to employment growth implies that the unemployment rate will not rise as in the RBA’s November forecasts to 4.4% in June and 4.5% in December but will plateau in 4.0% to 4.2% range this year. In turn, wage growth in the RBA’s November forecasts at 3.4% y-o-y in June and 3.2% in December is likely to need revising above 3.5% y-o-y in both cases.
These likely revisions to the RBA’s forecasts of labour market conditions in 2025 mean that inflation tracking below the RBA’s November forecast at the end of 2024 at 2.4% y-o-y for the CPI against forecast 2.8% and 3.2% for the trimmed mean against 4.0% for the trimmed may stay at or below forecast through to June (RBA’s November forecasts 2.5% for the CPI and 3.0% for the trimmed mean). But beyond June it is likely that inflation pushes up to, or above, the RBA’s November forecasts of 3.7% y-o-y for the CPI and 2.8% y-o-y for the trimmed mean in December 2025. Apart from tighter than previously expected labour market conditions supporting inflation later this year, the second half of 2025 is also when the base effect chock full of government cost-of-living measures in the second half of 2024 pushes annual inflation up sharply. The low 0.2% q-o-q and 0.5% q-o-q CPI and trimmed mean increases in Q4 2024 will not repeat in Q4 2025 and are likely to come in much higher around 0.8% q-o-q for both the CPI and trimmed mean
The bigger damage to the RBA’s inflation forecasts from the tighter than previously forecast labour market continuing through 2025 comes with a lag in 2026. Instead of CPI and underlying annual inflation easing through 2026 to 2.5% y-o-y for both at the end of the year, it is more likely that inflation becomes sticky nearer to 3.0% y-o-y. That is a reasonable revision to expect to the RBA’s 2026 inflation forecasts in the Monetary Policy Statement to be released tomorrow, given the revisions it needs to make to labour market forecasts for this year.
These likely revisions to the RBA’s economic forecasts mean that any interest rate cut tomorrow is at best the first in a very shallow and probably short-lived interest rate cutting cycle. The alternative, is to accept that given the revised economic outlook no change to the cash rate is warranted and that the higher cash rate persisting for longer may help to soften labour market conditions and generate a longer term inflation outlook that down the track may provide scope for a more meaningful set of cuts to the cash rate that stand more chance of staying in place for a longer period of time.
We have provided a view of what needs to change in the RBA’s economic forecasts. What the RBA does to its economic forecasts tomorrow will inform the interest rate setting committee’s rate decision. Those revisions to their November forecasts will indicate the room the RBA has to cut the cash rate and how deeply those cuts can go and for how long they can last. If the RBA revises its economic forecasts along the lines indicated above any rate cut tomorrow is unlikely to be followed up quickly with another and runs the risk of reducing the likelihood of inflation returning consistently to the middle of the RBA’s 2-3% target band by the end of 2026. We suspect that the RBA may surprise most pundits and the market by deciding to wait longer before cutting the cash rate.