AUSTRALIA’S central bank is poised to cut interest rates for the first time in four years even as the board remains alert to potential inflationary pressures from mounting global trade turmoil and risks of an election splurge at home.
A majority of economists in a Bloomberg News survey as well as traders expect the Reserve Bank of Australia (RBA) to finally embark on easing on Tuesday (Feb 18) with a 25 basis-point reduction in the cash rate to 4.1 per cent. That would be the RBA’s first cut since November 2020 and may provide a shot in the arm for Prime Minister Anthony Albanese, who needs to overcome poor polling to secure a second term.
Money markets are pricing about 85 per cent chance of a cut. Yet a pick up in consumer spending, aided by tax cuts and government subsidies, along with rising uncertainties about the impact of US trade policies may also convince policymakers to stay cautious.
The RBA’s level of policy restrictiveness remains broadly on par with its major counterparts because it did not tighten as aggressively in 2022 to 2023. The board had sought to hold onto labour market gains while bringing inflation back to target – a delicate balance that has drawn some criticisms.
Below are the arguments for and against a rate cut on Tuesday.
Why cut?
Price pressures are receding at a faster pace than the RBA anticipated, according to data. This is likely to be reflected in its quarterly update of macroeconomic forecasts released together with the rate decision. At the same time, the economy has slowed sharply since 2023.
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“If I were still at the RBA, I’d struggle to write a board paper justifying rates on hold given how much inflation has come down, given the likely near-term trajectory and given how much the RBA is going to have to revise its forecasts in the new round,” said Luci Ellis, chief economist at Westpac Banking who was an assistant governor at the central bank.
Still, the discussion around policy easing is unlikely to be straightforward, with the RBA’s statement and governor Michele Bullock’s press conference widely expected to tilt hawkish.
“It’s hard to know how much they will pivot their language,” Ellis said. “However, this is not a big cutting cycle. We really think they have got at most 100 basis points.”
Economists expect the RBA’s latest inflation forecasts to show a downward revision to its closely-watched trimmed mean gauge.
There are signs of “disinflation durability” with cooling price pressures in rents, new home purchase costs and insurance, economists at Rabobank pointed out. Consumer inflation expectations as measured by the Melbourne Institute are back to pre-Covid levels and business capacity utilisation levels are easing.
Why extend pause?
The case to hold is also strong, and hinges on factors including a recent pick-up in consumer spending underpinned by income tax cuts and government cost-of-living subsidies. These, together with cooling inflation, have boosted household disposable income which has spurred consumption.
Westpac’s Ellis and her counterpart at Commonwealth Bank of Australia Gareth Aird see at least a 20 per cent probability the RBA stands pat on Tuesday and keep the rate at a 13-year high of 4.35 per cent.
The Australian dollar has fallen more than 5 per cent since the US election in November, increasing the cost of imported goods.
Meanwhile, Australia’s jobless rate stayed low in December while vacancies remain high, suggesting unemployment could fall further and boost compensation.
Government wages data is due on Wednesday while the January employment report will be released the day after. Bullock will also get an opportunity to deliver her verdict on the two key sets of data on Friday when she appears before a parliamentary committee for three hours of testimony.
There are concerns too that government spending will further increase as Australia heads to a general election due by May 17. Already, state and federal governments are spending heavily, keeping demand elevated and adding to the difficulty of cooling the critical last mile of inflation.
“The level of rate cut certainty priced into the RBA meeting is too high,” said Sean Keane, chief Asia-Pacific strategist for JB Drax Honore. “A rate cut might well prove to be the right thing later in the year, but the Australian economy is not screaming out for it at present and there’s little reason to rush.” BLOOMBERG
