Key insights from the week that was.
In Australia, the RBA’s November Meeting Minutes provided a deep dive into the Board’s baseline views and assessment of risks. Chief Economist Luci Ellis subsequently discussed a number of noteworthy developments, one being the statement that the Board “would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable.” This is in line with the Board’s policy strategy to take and signal a patient and careful approach to assessing current disinflation. It should also be noted that the RBA’s economic and policy forecasts incorporate technical assumptions on the cash rate path based on market pricing. Of late, market pricing has shifted the start date for cuts back and also reduced the expected quantum of easing; the RBA have expressed a greater degree of comfort with such a view, considering known risks at this time.
Following these developments, we adjusted our view on the most probable path for monetary policy. We have moved back the start date for the cutting cycle from February to May, but have retained 100bps of easing in 2025, with a terminal rate of 3.35% still forecast for the December quarter. We see risks to the timing of the first cut in May as broadly balanced. Some of the more notable risks include the pace of the expected recovery in consumer spending following Stage 3 tax cuts – the hit to real incomes in prior years and caution shown by consumers towards spending in recent months leads us to expect a slower recovery in consumption growth than the RBA – and the tightness of the labour market. Both of these uncertainties have important implications for inflation’s trajectory. Next week’s October monthly inflation gauge will be another important update on Australia’s immediate inflation pulse and the risks (see here for our preview).
Over in the UK, annual inflation accelerated to 2.3% in October as electricity price rebates from 2023 cycled out. Core inflation was unaffected by this development, but edged higher to 3.3%yr in the month as services inflation remained sticky around 5.0%yr. Inflation is on track to overshoot the Bank of England’s 2.0%yr target for 2024 overall – the CPI needs to rise just 0.1% in the next two months for annual inflation to print at 2.25%yr come December 2024. The BoE’s more cautious tone around back-to-back cuts hence speaks to the lingering uncertainty for inflation.
In Japan meanwhile, while the data has not pushed rate hikes off the table, it is also yet to convince that the virtuous cycle of prices and wages is being sustained. Governor Ueda noted this week that the December meeting would be ‘live’ and that data between now and December would dictate their decision. CPI ex. fresh food came in slightly above expectations at 2.3%yr in October, below September’s 2.4%yr and August’s 2.8%yr, but above the 2.0%yr policy target. Services inflation has shown greater momentum in the past three months. RENGO leader Tomoko Yoshino has called on the new Prime Minister to support small businesses in raising wages ahead of the union’s wage negotiations in March. RENGO will be targeting another 5.0% increase in wages for FY25 after it secured a 5.1% increase in FY24. Persistence in inflation will help make the union’s case, as will support from the government. Large businesses in Japan have been quieter this year about their wage plans. Arguably, the BoJ will want to see evidence that businesses intend to maintain wage growth in FY25 before they raise rates again.
