AMP Capital Chief Economist, Shane Oliver outlines the case that the RBA will ease monetary policy
(AMP Capital) Given the Reserve Bank of Australia’s hawkish tilt another rate hike still can’t be ruled out but in the absence of inflation staying higher than expected we see it as a low probability at around 10% and continue to see rates as having peaked with the next move being down. Here’s seven reasons why.
- Monetary policy remains restrictive.
- The full impact of past rate hikes is still feeding through.
- Recession risks are high as indicated by the ongoing slump in real household spending per capita – the tax cut boost will be largely offset by households looking to support their depressed saving rate and a roughly 1 percentage point reduction in population growth. Meanwhile the outlook for home building and business investment looks soft.
- Forward looking jobs indicators warn of a significant further rise in unemployment ahead.
- Wages growth has peaked which will slow underlying services inflation.
- Allowing for Australia lagging the inflation cycle in the US and other comparable countries indicates that Australia is not that different in terms of getting inflation down and will likely see a resumption of falling underlying inflation in the months ahead.
- Finally, the downside risks around the US and Chinese economies have increased.
We expect the first cut in February, but despite RBA guidance it could still come late this year if economic data and or share markets weaken sharply.
Our base case is that in the absence of a negative shock it will likely take more than one good quarterly CPI release to see the RBA get “confident that inflation is moving sustainably towards the target” and so it will likely wait for the December quarter CPI release in late January before starting to cut in February. However, the Governor’s guidance of ‘no rate cut before year end’ is not iron clad. The 2021-22 experience with ‘no rate hike before 2024’ RBA guidance highlights that the RBA can get it wrong. The RBA’s guidance is contingent on current forecasts with the reference to the Board’s thinking “at the moment” and that thinking could change quickly. In this regard the RBA will likely be forced to cut earlier and quicker if it has to change its forecasts in the event of much weaker economic conditions and or a sharp fall in share markets. In terms of what the RBA should do as opposed to what we think it will do, given the US experience it should now be starting to give consideration to a cut in interest rates as it now risks much higher unemployment and inflation falling below target.
The money market doesn’t always get it right either and it bounces around a lot. It was premature in expecting cuts earlier this year, but it was right in early 2022 in anticipating imminent rate hikes despite the RBA pushing back against it. Right now, it’s still fully pricing in a rate cut by year end despite the RBA’s guidance.
There’s lots of comments around that the RBA can’t not follow the Fed and other central banks. But historically this has not been the case as when different economic conditions justify it the RBA has diverged (eg hiking in 2009 when the Fed was holding, and holding and cutting through 2015-2018 when the Fed was hiking). That said, we do think it will ultimately follow the Fed and other central banks because our economy and inflation cycle is similar with Australia following with a three-month or so lag.
Shane Oliver/AMP Capital
