RBA Monitor: Status quo in April as RBA sticks to data dependency while increasing fiscal stimulus

The Reserve Bank of Australia (RBA) is expected remain vigilant in its April meeting given the still stubborn inflation data while the economy decelerates pushing for more fiscal support. On the former, while the trimmed mean CPI, a measure of underlying inflation, fell back to +2.7% YoY in February, after slightly picking up in January (Chart 1). However, services inflation remained at +3.6% YoY in February, which is why inflation has been elevated over the past few years. One of the main reasons behind the sticky inflation has been the tight labor market. Although employment growth declined by -52.8K in February by surprise, the unemployment rate was still historically low at 4.1%. For this reason, the deceleration in nominal wage growth has been limited to +3.2% YoY in Q4-24 from the peak of +4.3% YoY in Q4-23.As the economy decelerates, the 2025-26 Federal Budget revealed that the fiscal policy will turn expansionary with the deficit on the underlying cash balance increasing to -1.5% of GDP in 2025-26 from -1.0% in 2024-25 (Chart 2). Key policy initiatives include personal income tax cuts of AUD 17.1 billion over the next four years and cost of living relief on electricity rebates and medicines. Furthermore, infrastructure investments on road and rail to support productivity will expand by AUD 15.6 billion over ten years.  The Government also committed to AUD 20.0 million “Buy Australian” campaign to support industries affected by Trump’s tariffs.Going forward, while the cost-of-living measures are likely to lower headline CPI, fiscal stimulus such as infrastructure investments are anticipated to lift underlying inflation through larger demand. Furthermore, the important point is that these policy initiatives will be introduced when the labor market is still relatively tight.For these reasons, the easing cycle which the RBA initiated in February is anticipated to be gradual at best. In fact, as the Aussie weakened to 0.62 against USD, a dovish stance could further depreciate the Aussie, with potentially negative consequences on inflation. Therefore, the Reserve Bank is expected to remain on hold at the next meeting on April 1st, by emphasizing data dependency.