"Although the RBA is becoming more attuned to downside risks to its outlook, we still think it will wait until early next year to cut rates.

"The minutes of the RBA’s September meeting confirmed that the RBA has in fact softened its tightening bias.

"Not only did the Board not discuss the case for a hike for the first time since March, but it also sounded more concerned about downside risks to the economy.

"In particular, members discussed the outlook for household consumption in great detail, given the unexpected contraction in Q2. 

"The Board’s baseline case continues to be that household consumption will pick up in the second half of the year, in response to a recovery in real incomes. However, that prediction looks increasingly tenuous. 

"Admittedly, retail sales did rise by a punchy 0.8% m/m in August. However, the ABS’ monthly household spending indicator, which covers two-thirds of private consumption (as measured in the national accounts), was unchanged in August in nominal terms.

"Moreover, that flat reading comes on the heels of a downward-revised 0.5% m/m fall in July.

"That means real household consumption could fall for a second consecutive quarter in Q3, a far cry from the 0.5% q/q rise implied by the RBA’s current forecasts.

"The RBA also noted that the economy could face other headwinds from the imposition of international student caps next year. We think those concerns are well founded.

"We calculate that the proposed cap on international student commencements will cause education exports to plunge by around two-fifths, shaving off 0.7%-pts off growth in 2025. And while the RBA argued the implications for capacity pressures were less clear, our own analysis finds that student arrivals are, on balance, inflationary.

"Nevertheless, there are still good reasons to believe the RBA won't rush to cut rates.

"First, employment growth has remained robust over the past few months, consistent with the RBA’s assessment that the labour market conditions are “tighter than those consistent with sustainable full employment”.

"Second, the Board noted that weak productivity growth was continuing to constrain the economy’s supply capacity.

"Third, financial conditions had loosened somewhat over the preceding months, raising the risk of a pickup in credit growth. Granted, market financial conditions have started to tighten anew since last week.

"However, given that the RBA tightened policy less aggressively than other central banks, we think it will take a cautious approach to loosening policy.

"The upshot is that we still expect the Bank to hand down its first 25 basis point rate cut only in February next year. And we expect only a modest 75 basis point worth of cuts across the easing cycle as a whole.