Synopsis:

ANZ forecasts weaker Q4 inflation, prompting a 25bp RBA rate cut in February. They maintain expectations for only two cuts in 2025, reflecting a cautious approach by the central bank.

Key Points:

1. Inflation Outlook:

   • Trimmed mean inflation is expected at 0.5% q/q in Q4, the lowest since Q2 2021.
   • Annual trimmed mean inflation is forecast at 3.2%, below the RBA’s projection of 3.4%.
   • Six-month annualized inflation is predicted to fall to 2.6%, within the target band.
   • Services inflation is estimated to drop to 4.1%, the lowest since Q3 2022.

2. RBA February Decision:

   • ANZ expects a 25bp rate cut at the February meeting due to softer inflation and wage growth, alongside resilient labor market conditions.
   • However, a hold remains possible if the RBA prioritizes risks from labor market tightness and a potential rebound in household spending.

3. 2025 Policy Path:

   • ANZ maintains expectations of two 25bp cuts in February and August 2025, bringing the cash rate to 3.85%.
   • The RBA is likely to adopt a cautious approach in easing policy, given ongoing concerns about inflation risks.

Conclusion:

ANZ sees a February rate cut as likely given weaker-than-expected Q4 inflation and subdued wage growth, though a cautious RBA approach could limit the depth of the easing cycle.