The market was unanimous on the RBA holding the cash rate.

The RBA’s last rate hike occurred in November last year, marking its 13th since it commenced its tightening cycle in May 2022.

Since then, trimmed mean inflation eased from above 5 per cent year on year to 3.5 per cent, but remains well above the RBA’s 2–3 per cent comfort zone, defying a cooling economy.

Productivity woes were partly to blame, economists agreed, with Q3 data having revealed falling output per worker and surging unit labour costs, up 4.3 per cent year on year.

Before Tuesday’s rate announcement, Paul Bloxham, chief economist at HSBC, attributed inflation’s stickiness to several factors: cautious rate hikes designed to protect employment, expansionary fiscal policies, and a struggling supply side.

“Our central case is that cuts will start from Q2 2025, and we expect only a shallow easing phase, with the cash rate at 3.85 per cent by end-2025 and 3.60 per cent in early 2026.

“We see a 25 per cent chance of no cuts at all in 2025,” Bloxham said.

Compounding the RBA’s dilemma is Australia’s surprisingly resilient labour market, CBA’s economist acknowledged last week, which remains at 4.1 per cent, even as GDP growth crawls at an annual rate of just 0.8 per cent – its slowest pace in decades outside of the pandemic.

Gareth Aird noted that rising joblessness was expected amid seven consecutive quarters of per-person economic contraction, but the labour market’s surprising resilience is sustaining inflationary pressures and keeping the RBA cautious.

“We expect the RBA board will leave the cash rate unchanged next week in a straightforward decision,” Aird said at the time.

He highlighted that while the central bank expected to see another contraction in the economy on a per-capita basis in the September quarter, “GDP growth was softer than the RBA anticipated.”

The CBA expects the central bank to begin cutting rates in February. Its peers, however, have pushed back their rate cut forecasts to May.

Two-speed economy

Last week, the ABS revealed that Australian gross domestic product (GDP) rose 0.3 per cent in the September quarter of 2024, and by 0.8 per cent since September 2023 – the slowest annual growth in GDP in more than three decades.

While the economy grew for the 12th quarter in a row, it has continued to slow since September 2023.

GDP per capita fell by 0.3 per cent, falling for the seventh straight quarter.

Similar to last quarter, economic strength was primarily driven by public sector spending, with government consumption and public investment playing key roles in driving growth.

In fact, government spending rose by 1.4 per cent, with social benefits to households having increased via the energy cost relief rebates.

Public investment rose 6.3 per cent in the September quarter, with general government investment growing 6.0 per cent on the back of defence equipment imports and investment in hospitals and roads. Recurrent public spending increased by 1.4 per cent on the quarter in the September quarter and 4.7 per cent over the year.

Conversely, household spending remained flat in the September quarter after a 0.3 per cent decline in June, with electricity and gas spending being the largest drag on growth due to energy bill relief rebates.

Business investment fell over the quarter, driven by a decline in non-residential construction (-1.8 per cent/quarter) and new engineering construction (-1.5 per cent/quarter). However, there was a partial offset by a lift in machinery and equipment (+0.6 per cent).

Commenting on the data, Aird said the economy clearly remains two-speed.

“Economic growth in the private sector has been non-existent over the past two quarters. It is only public spending that has kept GDP growth positive over that period,” he said.