RBA: Rate cuts are likely forthcoming – Standard Chartered

We maintain our view of a 25bps rate cut by the Reserve Bank of Australia at the 18 February meeting. A tight labour market presents downside risk to our view of 100bps of RBA rate cuts in 2025. Swaps are pricing c.22bps of RBA cuts in February, which should limit AUD weakness due to the cuts. Near-term risk-reward likely favours AUD upside vs USD, especially if Australia is exempt from US tariffs, Standard Chartered's FX and Macro Strategist Nicholas Chia reports.

Near-term risk-reward likely favours AUD upside vs USD

"We maintain our view that the Reserve Bank of Australia (RBA) will kickstart its rate-cutting cycle with a 25bps cut at the 18 February meeting, bringing the cash rate to 4.10%. While underlying inflation – proxied by trimmed mean CPI inflation (Q4: +3.2% y/y) – remains above the RBA’s 2-3% target, we think the central bank will justify the cut by noting that the economic conditions have evolved largely in line with its expectations. Headline Q3-2024 GDP growth (+0.8% y/y) was weaker than the RBA estimated while the labour market was tighter than its expectation, which should assuage its concerns over an abrupt slowdown in economic activity."

"We see a risk that terminal rates end up higher than our forecast for 2025 (3.35%). The labour market has been tight relative to previous RBA tightening cycles: the labour force participation rate reached a record level (67.1%) and the unemployment rate remained sticky at 4% at end-2024, relieving pressure on the central bank to cut rates aggressively (Figure 1). This may also be a consequence of the RBA’s dual mandate of managing the acute policy trade-off between price stability and full employment. We doubt the RBA will offer substantive forward guidance on monetary policy as it requires more clarity on the disinflation process before getting rates back to neutral, which it estimates to be in the region of 3%-4%."