(Bloomberg) -- Goldman Sachs Group Inc. reckons money market pricing for Australian interest-rate cuts over the next 12 months is “too shallow,” forecasting instead that cooling inflation and rising unemployment will force the Reserve Bank to act earlier.

Traders are wagering the RBA will hold the cash rate at the current 4.35% for about another year, with the first cut only seen in July 2025. In contrast, Goldman sees three reductions by then for a cash rate of 3.6%.

“Financial markets are pricing too shallow of an easing cycle over the medium term,” Goldman economists led by Andrew Boak said in research note. “Our base case is for the RBA to start easing in November 2024, following softer inflation data over the coming quarters, an ongoing cooling in the labor market and the likelihood of easing cycles across key G-10 peers.”

The RBA has held its cash rate at 12-year high since a surprise hike in November, highlighting that aggregate demand still exceeds the economy’s supply capacity. While the central bank remains in data-dependent mode, with inflation still above the 2-3% target, it has also signaled that the bar for any further hikes is quite high.

Australia’s economy slowed in the final three months of last year and retail sales volumes have slid in five of the past six quarters. In addition, a large drop in business forward orders in April “highlights a non-negligible risk of an outright contraction in domestic demand,” Boak said. 

He expects unemployment will rise to 4.6% by year’s end, from 4.1% in April. Goldman’s proprietary gauge of underlying inflation also showed “stable” price pressures in the first quarter, according to the note.

“The latest high frequency data and our bottom-up analysis leave us confident that the underlying disinflationary trend remains in place,” Boak said.

Additionally, the rise in mortgage rates for Australians has outpaced global peers in both speed and magnitude, Goldman said. 

“This mirrors the signal from our proprietary measure of financial conditions, which has tightened further in the past month alongside the rise in the real trade-weighted currency and remains a materially larger headwind to growth than in the US.”

--With assistance from Garfield Reynolds.

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