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Jan 23 - 09:55 AM

Credit Agricole: We Now Expect the RBA to Deliver a Hawkish Cut in February

By eFXdata  —  Jan 23 - 08:43 AM

Synopsis:

Credit Agricole anticipates that the Reserve Bank of Australia (RBA) will deliver a hawkish 25bps rate cut at its February meeting, contingent on next week’s inflation data. While lower inflation metrics may prompt easing, structural inflationary pressures and global uncertainties suggest a cautious policy approach.

Key Points:

  1. Inflation Data as a Trigger:

    • Trimmed mean inflation readings of 0.5% QoQ and 3.3% YoY would surprise the RBA, bringing core inflation to 2.6% annualized, squarely within the 2-3% target band.
    • Trimmed mean figures of 0.4% QoQ and 3.2% YoY would likely solidify the case for a February rate cut.
  2. Rationale for a Hawkish Cut:

    • Sticky inflation drivers: Solid wage growth coupled with low productivity and elevated rental inflation are expected to sustain underlying price pressures.
    • Policy considerations: Fiscal expansion during an election year and external price pressures from Trump's tariffs add complexity to the RBA’s decision-making process.
  3. Market and Policy Implications:

    • The RBA's current cash rate of 4.35% is seen as only modestly restrictive. A small rate cut would provide flexibility without significantly undermining inflation management.
    • RBA Governor Michele Bullock is expected to emphasize that the easing cycle will be shallow and cautious, managing household expectations amidst mixed labor market indicators and international uncertainties.

Conclusion:

A hawkish cut by the RBA in February appears increasingly likely, as inflation data could provide the final nudge. The RBA is expected to carefully navigate domestic and international headwinds, reinforcing the message of a modest and data-driven easing cycle.

Source:
Crédit Agricole Research/Market Commentary

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