Synopsis:

Credit Agricole now sees a February rate cut by the RBA as likely, following softer Australian inflation data, though the rate-cutting cycle is expected to remain shallower than market pricing.

Key Points:

1. Inflation Data Overview:

   • Headline inflation for November rose slightly to 2.3% YoY (consensus: 2.2%) due to timing of government electricity subsidies.
   • Trimmed mean inflation fell to 3.2% YoY from 3.5%, below the RBA’s Q4 forecast of 3.4% and approaching the 2-3% target band.
   • Services inflation declined to 4.2% YoY (from 4.8%), while owner-occupier housing inflation dropped to 2.8% YoY (from 4.2%), entering the target band for the first time since July 2021.
   • Rental and insurance inflation remain elevated at 6.6% and 5.5% YoY, respectively, but are showing signs of easing.

2. Market Implications and Expectations:

   • Australian rates markets now price a 75% probability of a February rate cut.
   • The final decision will hinge on Q4 inflation data (due January 29), which could further surprise to the downside.

3. RBA Policy Outlook:

   • Credit Agricole expects only two 25bp rate cuts in 2025, compared to market expectations of three.
   • The cash rate at 4.35% is only modestly above the RBA’s estimated neutral rate of 3.50%.
   • Sticky inflation, driven by low productivity growth, a tight labor market, and high government spending, will likely necessitate maintaining neutral to slightly tight monetary policy.

Conclusion:

Credit Agricole anticipates the RBA will likely begin its rate-cutting cycle in February, but the overall cycle will be shallower than market expectations. This restrained easing approach, alongside sticky inflation, will provide underlying support for the AUD.