The Reserve Bank of Australia (RBA) is set to make a crucial decision regarding interest rates, with markets predicting a 25 basis points (bp) cut next week on February 18. This anticipated move comes as the Australian economy grapples with slower export growth and weaker-than-expected household consumption. The AUD cash rate future curve currently reflects expectations of a 25bp rate cut in February and a total easing of 83bp by the end of the year. The RBA faces a delicate decision in balancing economic risks and supporting growth.
The current positioning of the AUD cash rate future curve, at -10bp, underscores the market's anticipation of a rate cut. In June 2024, the curve was paired with an AUD/USD rate of approximately 0.66, compared to the current level of 0.63. This shift highlights the pressures on the Australian dollar amid global economic challenges. The RBA is expected to maintain flexibility in its approach, reflecting on economic risks as it considers rate adjustments.
Economic indicators have prompted the RBA to consider easing monetary policy. Wage pressures have eased more than projected, and household consumption growth has not met expectations. These factors, coupled with a slowdown in exports, particularly to China, have painted a cautious outlook for Australia's economic trajectory. Additionally, headline Consumer Price Index (CPI) corrected from 3.8% in June 2024 to 2.4% in the third quarter, signaling a moderation in inflationary pressures.
The RBA's decision-making process is further complicated by international factors, including the United States' plan to increase duties on global trade partners, with China remaining a primary focus. These global dynamics could influence Australia's export-dependent economy, prompting the central bank to weigh its options carefully. The RBA's expected course of action suggests a cumulative rate cut of 100bp by 2025, bringing rates to a terminal level of 3.35%.
Despite these considerations, the decision to cut or pause rates remains finely balanced. Wage growth has decelerated to 3.5% in the third quarter of 2024 from 4.1% in the preceding quarter, indicating a softening labor market. However, December 2024's strong headline employment growth primarily resulted from part-time job increases, suggesting underlying vulnerabilities in full-time employment sectors.