The Commonwealth Bank of Australia (ASX: CBA) share price is up 0.34% to $142.58 ahead of tomorrow's interest rates decision.
Gareth Aird, CBA's Head of Australian Economics, expects the Reserve Bank of Australia (RBA) to keep interest rates on hold.
But he also expects "some shifts in language" in the RBA's statement that will accompany the decision, following the publication of September quarter inflation figures that showed a significant fall.
Specifically, Aird and his team think the possibility of a rate rise from here has been quashed.
He thinks this should lead the RBA Board to water down its oft-repeated comment that it needs to remain vigilant to the upside risks to inflation and is therefore "not ruling anything in or out" regarding the next move on interest rates.
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Here's why CBA thinks interest rates will remain on hold
In the September quarter, the annual headline inflation rate fell to 2.8%, its lowest level since the March 2021 quarter, and within the RBA's target band of 2% to 3%.
However, the RBA pays much more attention to the trimmed mean inflation, which excludes highly volatile items.
The trimmed mean inflation fell to 3.5%, which is still well above the target band.
Aird said this was in line with the RBA's forecasts for the quarter. Therefore, the board should be content to keep interest rates on hold.
We expect the cash rate will be left on hold and see the chance of any other outcome as trivial.
The unemployment rate has travelled a touch lower than the RBA's implied profile over Q3 24, but this is an outcome that will be welcomed and is not a cause for concern given the fall in the rate of inflation.
Prospect of a rate rise unlikely
Aird says the CBA team expects the RBA's statement to retain a "neutral bias" tomorrow.
However, he also anticipates a watering down of any reference to the possibility of a rate rise.
… the RBA's communication strategy has erred on the side of caution.
The Board appears to be fond of the line that it is 'not ruling anything in or out' as it does not paint them into a corner.
But we are approaching the point at which the Board should feel confident that the next move in rates will be down and not up.
Anticipated 'shifts in language'
Aird said the RBA's next communication should reflect the balance of risks to the monetary policy outlook.
The Q3 24 inflation data meant that upside risks to the RBA's inflation profile did not materialise over the September quarter. And that will give the Board greater confidence that another rate increase in this cycle will neither be warranted or delivered.
That is particularly the case given monetary policy is declared restrictive by the RBA and the real cash rate is rising as inflation is falling.
Aird noted that the jobs market remains tight, wage pressures appear to be easing, and early data on household consumption in the September quarter implies more people are saving their extra income from tax cuts.
He said: "… some softening in the language around the persistence of inflation is more likely than not given the recent inflation outcomes."
The RBA Board has repeatedly said that it needs to see inflation moving "sustainably" lower toward its target band before it will even consider cutting interest rates.
In other words, the board needs to be satisfied that inflation is on a continuous downward trajectory.
Aird thinks there is now enough evidence of this, commenting:
The upshot is that the latest inflation data will leave the Board more assured that core inflation is on its return sustainably to the target band. And therefore the current policy settings are appropriate.
When will we see an interest rate cut?
Before the latest inflation data was released, CBA was the only Big Four bank forecasting a cut to interest rates this year.
Aird explained that they had forecast a lower trimmed mean inflation number for the September quarter.
This had "underpinned our view that the RBA could commence normalising the cash rate in December".
CBA has now changed its call on the timing of the first cut to interest rates.
He said:
We jettisoned that call after the data dropped as the trimmed mean outcome was simply not low enough to see the RBA cut rates this calendar year.
Our base case is now for a first cut in the cash rate in February 2025.
