MNI INTERVIEW: Stronger Q3 Inflation To Limit RBA Easing

A rise in Q3 Trimmed-mean inflation will make further cuts to the Reserve Bank of Australia’s 3.6% cash rate unlikely without a significant deterioration in the labour market, a former senior official told MNI, adding that recent data suggest inflation may already have found its floor.

Justin Fabo, founder of Antipodean Macro and the RBA’s former head of international financial markets, said recent NAB Business Survey data showed improved conditions despite the output gap running above zero. “If you ignore what the Bank is saying and the judgement it’s applying to its forecasts around things like the NAIRU and inflation over and above their models, inflation basically got to 2.5% and that’s as good as it gets – and we were probably lucky to get there,” he said.

He added that because the RBA hiked less than peer central banks, it has “less to cut on the way down,” making the recent shift in market pricing appropriate. Investors now assign just a 40% chance to a November cut, with the cash rate expected at 3.26% by mid-2026.

Fabo agreed with Governor Michele Bullock’s comments that holding the cash rate steady at this week's meeting was appropriate given what she described as a positive economic landscape, but he warned the Bank was “feeling its way” toward neutral. (See MNI RBA WATCH: Bullock Declines To Confirm Easing Bias) “They’ve got no idea… they think there’s every chance they’re around neutral, maybe a bit above, maybe a bit below.”

Fabo’s view has shifted since August, when he expected the RBA was likely to deliver two more cuts, with the risk skewed toward just one. (See MNI INTERVIEW: RBA TO Cut Twice More - Ex-Economist)

LABOUR MARKET RISK 

Employment growth has outperformed GDP growth in some sectors, impacting productivity, but this was largely driven by compositional factors, Fabo noted. 

While there is a risk of "air pockets" forming in some sectors as the composition of growth shifts from government spending toward less labour-intensive private demand, potentially giving doves on the Board cover to cut again, a strong Q3 trimmed mean would underline persistent pricing power, he warned.

“Even taking the last couple of quarters together, inflation still looks robust,” he said. "When they're staring down a barrel of what I think will be very strong underlying inflation number for Q3, it'll be interesting to see how they balance out [the dual mandate]." 

 Trimmed-mean is looking like coming in at around 0.9–1.0% q/q, he said. 

HOUSING STRENGTH

Housing strength further complicates the picture, Fabo added. Prices are rising quickly and government stimulus could accelerate gains, lifting consumption and firms’ confidence in rising prices. “If you’re just looking at the housing market, you’d be thinking about borderline hiking, not easing,” he said, pointing to data that showed property values rose 0.8% nationwide in September, while rents increased 0.5%. 

With rents still climbing and vacancy rates falling, Fabo noted that housing-related inflation is tightly correlated with the trimmed mean, making it unrealistic for the RBA to project inflation flatlining near 2.5%. “That seems like fantasy land to me,” he said.

He questioned whether the RBA’s November forecasts could credibly assume a steady disinflation path if Q3 inflation proves strong. “I can’t see how they just revert to the same profile as before — that would be an absolute joke,” he said.

The Australian Bureau of Statistics will publish Q3 CPI on Oct 29, ahead of the RBA's Nov 4 meeting.