RBA in Wait-and-See Mode Despite Drop in Inflation

• • RBA to stand pat at 4.35%
  • Aussie may not be affected from this meeting
  • Decision due on Tuesday at 3:30 GMT

RBA policy to remain unchanged

The upcoming Reserve Bank of Australia (RBA) policy meeting on November 5 is highly anticipated, with the bank adopting a wait-and-see approach and holding the cash rate steady while monitoring economic developments. The focus will be on ensuring that inflation continues to decline and that the economy remains on a stable growth path, with potential rate cuts anticipated in early 2025 if conditions improve.

Inflation ticks down within target

Recent inflation figures show a mixed but overall encouraging pattern. In the September quarter, the headline inflation rate dropped to 2.8%, the lowest level in three and a half years. Significant drops in fuel and electricity prices, aided by government rebates, drove this decline. However, underlying inflation, measured by the trimmed mean, remains above the RBA’s target band at 3.5%. This persistent core inflation suggests that the RBA may need to maintain a cautious stance as service sector inflation, particularly in rents, insurance, and childcare, continues to exert upward pressure.

GDP and economic growth

The development of Australia’s GDP has been modest. The June quarter of 2024 saw a 0.2% q/q increase in economic growth, which is consistent with the ongoing trend of gradual but consistent expansion. The weakest annual growth since the early 1990s, with the exception of the pandemic period, was 1.5% in the 2023–24 fiscal year. Although government expenditure has provided some support, this lethargic growth is a result of subdued household consumption and a decline in discretionary spending.

Various factors, including international economic conditions, domestic inflation patterns, and labor market robustness, will influence the RBA’s decision. The recent decrease in headline inflation is promising; however, the RBA remains vigilant about the stickiness in underlying inflation and its possible effects on the economy. The GDP data underscore the necessity for ongoing support to foster economic growth and tackle the difficulties confronting households and companies.

Aussie stands near critical area

Investors will closely scrutinize the language and tone of the RBA’s statement, even though the immediate decision to hold rates might not cause significant movement. Investors will look for clues about future monetary policy direction, which will influence the Aussie’s trajectory in the coming months.

Aussie/dollar rebounded off the 0.6535 support level, which overlaps with the medium-term uptrend line, with the next strong resistance coming from the 200-day simple moving average (SMA) near 0.6620. However, a tumble beneath the diagonal line could open the way for a test of the bearish spike of 0.6360, achieved on August 5.