Westpac's Luci Ellis says the RBA has almost certainly not yet decided whether or not to cut the cash rate in November. The data flow from here will determine the outcome, with hesitation now likely to result in more cuts later.

By Luci Ellis*

It’s almost certain that RBA has not yet decided whether or not to cut the cash rate at its November meeting. If the meeting were held today, they would keep rates on hold, awaiting further data. Several potentially decisive data releases are due before the actual meeting, though, including the September labour data and the full quarterly CPI.

Until then, we need to hold two possible futures in mind: hold or cut.

The August CPI indicator did imply an ugly result for the September quarter. Our own nowcast for the trimmed mean measure is a ‘big’ 0.8%qtr that could easily round up to a 0.9%, a result that would surely stay the RBA’s hand. 

Looking at the detail, though, outside home-building costs it is not clear that the August data provided much signal of an ongoing higher rate of inflation than expected. As we noted at the time, the result in market services was mixed, with some personal services inflation below our forecasts while the cost of eating out was stronger. The latter suggests that, following a period of retrenchment in hospitality (evident in the labour account employment data), improving conditions have allowed for some margin repair. Some of the price gains may also indirectly relate to recent annual award wage increase; though this is a normal seasonal effect, its size will depend on how margins react. Neither of these influences on price growth are likely to be sustained if demand remains patchy.

We therefore think the economy could be in for something like a re-run of late 2023, when an upside surprise in September quarter inflation was followed by a downside surprise (to something more like our own near-cast) in the December quarter. The result was a hike in late 2023 followed by an ‘on-the-fly’ pivot following the February 2024 meeting – from flagging possible further hikes in the post-meeting statement to ‘not ruling anything in or out’ in the media conference. That message landed a lot better, and sure enough, the next move was, eventually, a cut.

We are also mindful of the two-sided risks around both the labour market and household spending data. We will know more about the labour market shortly when the September monthly labour force data is released next week, completing the picture for the quarter. So far, we see a gradual softening in employment growth as demand pivots away from the jobs-rich ‘care economy’. The unemployment and underemployment consequences of this are being masked by an unwind in the extra labour supply induced by earlier cost-of-living pressures. With demographic drivers still implying an upward trend in labour force participation, we see more latent labour market slack emerging over time and weighing on wages growth and inflation. There is precedent for this outcome in Australia’s experience in the late 2010s.

On household spending, the August Household Spending Indicator, released after the September RBA Monetary Policy Board (MPB) meeting, was notably below market expectations. This accords with our assessment that the expected recovery in consumer spending has been patchy and that the strength in national accounts consumption in Q2 partly reflected some one-off factors such as insurance payouts and the unwinding of some electricity rebates. T

hough we see two-sided risks around the consumption outlook, the more downbeat tone from consumer sentiment in recent months certainly suggests that underlying momentum is still subdued. Given how weak real household incomes have been for a number of years, this ongoing pessimistic tone does not surprise us.

Recall also that a recovery in household spending is necessary to counterbalance the slowdown in public sector demand growth that is already underway. Faster growth in household spending should only stay the MPB’s hand from further rate cuts if the pick-up is stronger than implied by the RBA’s August forecasts. These were constructed on an assumption of a couple more cash rate cuts, as the market was pricing at the time.

Far too many observers are in the habit of seeing any pick-up in demand or housing prices as something for policy to react against, rather than as the expected and intended transmission of monetary policy. The Governor’s comments at the latest media conference show that the RBA, at least, does understand the difference.

The rates outlook boils down to the issue of how much signal to take from an upside surprise in one quarter in terms of what that means for subsequent quarters. RBA Governor Bullock has on several occasions insisted that ‘we will be guided by our forecasts’. However, that statement sits a bit uncomfortably with the flat profile for the RBA’s trimmed mean inflation forecasts and the unemployment rate. 

These give the impression of a set of forecasts being used as a communication device to explain and frame a policy decision rather than an independent input into that decision. This is understandable and perhaps inevitable given the judgement involved in synthesising the output of many different models and information sources. However, it does hold the risk that the policy view helps shape the forecast rather than the other way around.

What’s left in these circumstances is reactivity to incoming data – that is, to the recent past. As well as making policy less predictable – contrary to the MPB’s stated intentions – it is not a great way to run an economy policy setting that affects the economy with a lag, especially when inflation has been within the target range for a little while now at the same time as policy is likely still restrictive.

Bottom line: the odds that the RBA cuts in November are, at this point, below 50% but still a long way from zero. The data flow could change things again. Frankly, the prospect of flip-flopping a ‘call’ as the month goes on is unattractive, especially when it is quite obvious that the policymakers have not made up their mind yet. We must hold the two possibilities in mind at least until the labour market data come in. (A good-enough labour market result would make it unlikely that the RBA would cut, even if the September quarter CPI comes in a little more benign than we currently expect.)

The RBA communications schedule has half a dozen speeches between now and the November meeting that will be opportunities for it to provide guidance on some of its key forecast judgements, though they all pre-date the release of the September quarter CPI. If the RBA does hold in November, though, our conviction that they end up cutting in February rises, as does our expectation that the trough will be 2.85% rather than something higher. The more the MPB hesitates in the face of uncertainty, the more likely it is that domestic inflation pressures surprise it on the downside next year, and trimmed mean inflation turns out more like the Westpac Economics forecast than the August RBA one.