RBA Maintains Steady Rates Amid Inflation Risks and Fragile Growth: Outlook for 2025 Easing

The Reserve Bank of Australia (RBA) is expected to keep its Cash Rate unchanged at 4.35% during its December 10th policy meeting, in line with unanimous forecasts from economists and market expectations. This marks the eighth consecutive hold, underscoring the central bank’s cautious approach. While inflation has eased, underlying pressures remain elevated. The RBA continues to emphasize a data-driven strategy, with Governor Michelle Bullock stating that the bank is not “ruling anything in or out” and remains ready to act if economic conditions worsen or inflation trends shift significantly.

During its November 5th meeting, the RBA reiterated its focus on restrictive policy until inflation is confidently on a sustainable path toward the target range. Inflation remains above target, and the RBA lowered its forecasts for GDP, household consumption, and inflation, acknowledging that Australia’s monetary policy is less restrictive compared to other major economies. The latest minutes revealed that the Board requires at least two more quarterly CPI outcomes, especially trimmed mean inflation data, to gain confidence in a sustained decline. Governor Bullock has noted that if inflation remains on its gradual slowing path, rates can stay on hold. However, a weaker-than-expected inflation print could accelerate the timeline for cuts. The next crucial CPI data, due on January 31st, will be pivotal. A trimmed mean inflation reading below Q3’s 3.5% could open the door for rate cuts.

The December 4th release of Q3 GDP data, which came in weaker than expected at 0.8% q/q (vs. 1.1% expected), further highlights the fragile state of economic growth. While the RBA has moved away from explicitly considering rate hikes, this disappointing growth data, combined with a potential slowdown in core inflation, strengthens the case for easing monetary policy in 2025. The RBA is currently projected to cut rates in Q2 2025, although market participants have shifted expectations to fully price a potential first cut in April, with some banks forecasting cuts as early as March or May 2025.

As a pro-cyclical currency, the Australian dollar (AUD) remains sensitive to global economic conditions. Slower growth in the U.S., Eurozone, and U.K. could pose headwinds for the AUD, while any pickup in global growth sentiment, particularly driven by Chinese stimulus efforts, could provide a tailwind. However, market enthusiasm over China’s stimulus measures has been limited so far, as details have yet to inspire significant confidence. For now, the RBA’s trajectory remains cautious, with rate cuts likely delayed until mid-2025 unless inflation and growth data compel earlier action.