The RBA’s pathway to lower rates remains very clear. The timing however, remains in question. In these uncertain times, RBA policy is best framed against the fragile global outlook, alongside domestic economic conditions.

The U.S. and China face immense challenges, whilst Australia's peer economies Canada and New Zealand have been easing monetary policy aggressively with the Reserve Bank of New Zealand just cutting rates 0.50% to 2.50%, a level already achieved by Canada.  

The RBA is likely to ease policy as well, albeit more gradually than in Canada and New Zealand, as disinflation takes its course here, while Australian households and businesses stay resilient in uncertain times.

Many analysts called an imminent end to the RBA's cutting cycle after August's monthly inflation figures surprised to the upside. This looks very premature; whilst the RBA may delay its November move, the path is clearly to lower rates.

Broad-based price pressures were present in the latest partial monthly CPI inflation release, pointing towards some upside risks to the September quarter inflation reading, which is being seen as a key indicator to green light further policy easing for November.

Should upside risks be realised, these commentators suggest the RBA should not only stay its hand at next month's meeting, but it should also maintain policy settings unchanged into 2026.

However, global developments prompt a more nuanced view. Indeed, there are immense structural changes underway in the world's two largest economies, the U.S. and China - and while asset prices remain buoyant across the world this year, activity, prices and labour markets in these economies are very finely balanced. The U.S. Government shutdown will significantly crimp economic activity at a time when the labour market is already cooling dangerously, all but guaranteeing continued U.S. Federal Reserve easing at upcoming meetings into year end.

Australia's similar neighbours amongst the cohort of advanced economies, Canada and New Zealand, are both responding to these tectonic shifts.

While there are differences, these economies are very similar to our own in key respects - both are open economies, heavily dependent on international developments: bulk commodity and agricultural price dynamics, and major trading relationships (New Zealand with Australia and Canada with the U.S.).

Australia, New Zealand and Canada have all experienced a bumpy and uneven disinflationary trajectory as post-pandemic restrictive monetary policies have taken effect.

The disinflation in all three nations has unfolded in the context of export- and public demand-led growth amid cautious consumers and businesses scarred by the pandemic, although both Canada's and New Zealand's labour markets have been much weaker and more vulnerable than ours to date.

The Reserve Bank of New Zealand slashed its policy rate by half a percentage point earlier [this week], in a surprise move that takes total easing to date to 3.00%, and the Bank of Canada also cut by 0.25% in September - for total easing to date in this cycle of 2.50%.

Both central banks cited moribund domestic activity and high unemployment rates, together with subdued external demand as the rationale for their latest decisions.

While commentators and analysts in Australia tend to focus on domestic macroeconomic conditions and RBA communications, together with money market pricing, as the best guide for the path of monetary policy in Australia, it is important to keep the broader global macro context in mind.

If our similar neighbours amongst major advanced economies, Canada and New Zealand, are engaging in aggressive monetary easing, then there is little doubt that the RBA is also carefully considering the experience of these economies and their central banks with a view to calibrating its policy reaction function to global developments accordingly.

While Canada and New Zealand are cutting at a rapid clip, the RBA appears to be on a similar trajectory, albeit at a far slower pace.

The direction of travel is clear and highly contingent on the global context - a single data point or two on inflation should not deter the RBA from further withdrawing monetary restrictions to allow policy to converge lower towards neutral settings. Indeed, this approach would fulfill its legislated objectives and be supportive for asset prices.