MNI INTERVIEW: Trimmed Mean Key To Feb RBA Hike

The Reserve Bank of Australia is likely to lift the 3.6% cash rate by a 25 basis points some time in H1, and could be tempted to do so at its Feb 3 meeting if Q4 trimmed-mean inflation prints above expectations, though any move would represent a minor adjustment rather than the start of a hiking cycle, a leading economist told MNI.

James Morley, professor of macroeconomics at the University of Sydney, said recent monthly CPI indicators suggest the Q4 trimmed mean, due Jan 28, is likely to come in above the RBA’s forecasts. “That, combined with recent labour market data, would certainly suggest that an increase is on the cards,” Morley said, citing December’s decline in unemployment to 4.1% alongside strong job creation.

However, Morley stressed that trimmed-mean inflation would need to print above 3.2%, 20bp higher than Q3, to warrant a move next month, adding that the Bank would also want to assess how the expiration of federal government energy subsidies flows through to the CPI.

“If inflation does come in higher than expected, even if part of that is noise related to energy rebates, the Bank may feel it needs to demonstrate its commitment to the inflation target,” he said. “A modest rate rise would allow the RBA to argue that its forecast path still returns inflation to target over the previously stated horizon.”

The RBA's November forecasts show the cash rate falling back below 3% by mid-2027, conditional on a market-implied cash rate path that declines to around 3.3%.

SLIGHT TWEAK

Morley said the stronger labour market gives policymakers greater confidence that the economy can absorb a small tightening, reducing near-term recession risks. The RBA may also be concerned that real interest rates remain somewhat low, potentially encouraging excessive risk-taking in credit markets, he added.

However, Morley cautioned against reading any increase as the start of a sustained tightening cycle, pointing to global uncertainty and external downside risks, including a weak Chinese economy and potential softening in Australia’s education exports due to a strengthening Australian dollar. The Bank would be reluctant to signal a full hiking cycle, with any increase framed as a small adjustment, he said.

Markets give a hike next month a 57% chance, with a 4.075% rate priced in by December. 

“Raising rates into an environment of weaker external demand would raise the risk of a harder landing,” Morley acknowledged, though he added that with unemployment at 4.1%, the probability of recession over the next six months remains low.

He expects Governor Michele Bullock to emphasise data dependence in post-meeting communication, focusing squarely on inflation risks while avoiding commitments to further hikes. “The messaging would likely stress that this is a calibration, not the beginning of a series,” Morley said, adding that policymakers may implicitly acknowledge that neutral rates are slightly higher than previously assumed, given the resilience of the labour market.

Even if the RBA ultimately holds rates in February, Morley said the tone is likely to remain hawkish, with officials signalling readiness to move should inflation fail to moderate as forecast. The Bank will also likely nod to a stronger Australian dollar via slightly higher trade-weighted index assumptions when it releases its next slate of forecasts alongside the February decision.