Every Tuesday afternoon we publish a collection of topics and give our expert opinion about the Equity Markets.

Today the RBA monetary policy board makes its final interest rate decision for 2024. It has been a frustrating year for mortgage holders in Australia, holding out for some interest rate relief. However, despite inflation falling throughout the year, the RBA has continued to hold rates at 4.35%. This goes against the grain of international counterparts, with most advanced economies now in a monetary easing cycle. ABSI this week looks at the final monetary decision of 2024 and forecasts when Australians may see the first interest rate cut since November 2020. 

I don’t envy Governor Bullock. Being head of the RBA is arguably Australia’s toughest job. She has politicians and mortgage holders all screaming for a cut in rates but so far has held strong on being dictated by data rather than the will of the people. 

However, the data isn’t exactly conclusive in that holding the cash rate is the right thing to do. There are plenty of data points that suggest a cut should come now. This includes Q3 GDP coming in at 0.3%, annualising at an anaemic 0.8% and negative on a per capita basis. Unemployment has slowly been ticking up to 4.1% with productivity waning 0.7% each year since 2020. Finally, real gross household disposable income per capita has fallen 8% in inflation-adjusted measures, which is the largest among OECD economies.

Calculating the Trimmed Mean & Weighted Median

Source: RBA

The data point that matters most to the RBA is inflation but not headline inflation, instead, they prefer to use a bespoke underlying inflation measure. In Australia, the measures of underlying inflation published by the ABS are the Trimmed Mean and the Weighted Median. The Trimmed Mean is the average rate of inflation after removing items with the largest price changes at either end of the spectrum to average out the middle 70% of items, while the Weighted Median is the rate of change on the middle item in the CPI basket. 

In October, Q3 inflation data was released which showed a 0.2% increase in headline inflation between July and September, taking the annual rate to 2.8%. This was down materially from the 3.8% in Q2 and led many to call for the rate cuts to begin. However, the RBA’s preferred inflation metric is the Trimmed Mean which came in at 0.8% for the quarter and 3.5% annualised, down from 4% in Q2 but still well above the RBA’s target 2-3% inflation rate.

All Groups CPI & Trimmed Mean Annual Movement (%)

Source: ABS

The reason for the difference was that Trimmed Mean excluded price falls in electricity, due to energy bill relief from the federal government, and large drops in fuel. At the other end of the spectrum, services inflation remains concerningly elevated and sticky at 4.6% in Q3, slightly higher than 4.5% in Q2. 

For those aching for interest rate relief, Trimmed Mean inflation is the number they need to keep a close eye on. Based on RBA messaging, they’re very worried that the embers of inflation could reignite and would like to see two-quarters of Trimmed Mean inflation below 3% before making any changes to the cash rate. That is under the proviso that unemployment does not increase materially; if it were to get 4.5% or above then I think they would be willing to take inflation risk in order to balance out the dual mandate of full employment and stable prices.

Looking at data and RBA meeting timetables in 2025, assuming that Q4 2024 and Q1 2025 CPI, released in January and April 2025, are below that 3% threshold then the earliest we may see a rate cut in 2025 will be in the May 19-20 meeting of the monetary policy board. However, it is likely that Q4 data will continue to remain too high, which may push the timetable back to August 11-12. My advice, prepare the worst and hope for the best.

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