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The Macro Landscape: The RBA is inching towards rate cuts

by Philip Brown - Head of Research, FIIG Securities | Mar 20, 2024
  • At their meeting yesterday, the RBA left the cash rate unchanged at 4.35% and caused a small stir by removing the direct reference to rate hikes in the statement. The market may have slightly overreacted to the topside when the RBA suggested there was an explicit risk of rate hikes in February, and may have slightly overreacted to the downside now that it has been removed. As many observers noted, the statement today was very much in line with the Governor’s press conference last month.
  • There’s a very strong chance that the minutes of this meeting suggest that a 25bp rate hike was considered, even if quickly abandoned in favour of no change. The more interesting question will be if the board considered three options: +25bp, 0bp or -25bp. That three-way consideration would definitely tally with the “risks in both directions” language from the press conference. The RBA often uses this language of “risks in both directions” when they are truly unsure of the likely developments.
  • We’ve previously highlighted the concept of economic momentum as the key unknown. It’s clear that the peak in both inflation and labour market tightness are behind us. But that’s different from saying that the RBA need to cut rates imminently. It depends critically on how quickly the economy is slowing and how quickly supply is catching up to demand. For example, the RBA explicitly said in the statement today that “the data are consistent with continuing excess demand in the economy and strong domestic cost pressures…” But notice that’s a point estimate. It’s talking about the economy and the data as they are now; and they are both weakening slowly over time. Observing that the demand is still too strong today doesn’t mean a rate cut can’t be appropriate at some point in the future on the current trajectory. Similarly, the RBA was also at pains to point out that the labour market remains tighter than is consistent with stable inflation. But the labour market is also slowly loosening, so the same analysis applies. The situation as of today doesn’t justify rate cuts, but the situation is inching, ever so slowly, towards rate cuts. For these variables, if nothing happens to alter the trajectory, the current momentum will take the RBA into a dovish bias, then eventually to rate cuts. The only question would be the timing.
  • One intriguing exception was wages growth. The RBA identified wages as being consistent with the inflation target “only on the assumption that productivity growth increases…” Assuming a sharp increase in productivity growth is fraught with risk. In fact, as a general rule, sharp increases in productivity tend to occur when there is a significant slowdown, at which point no one would be looking at productivity any more as the critical factor and rate cuts would be blindingly obvious.
  • We noted above that if there were no further developments, the inflation trajectory and the labour market trajectory would see the RBA moving to cut rates eventually. But there is at least one development coming shortly: material tax cuts. We don’t see the tax cuts as significant enough to change the trajectory by themselves, but they may well be significant enough to slow the weakening momentum. Particularly so as the consumption side of the economy also stands to benefit from the fact real wages are now positive. These are not going to solve the cost-of-living situation in one fell swoop, but they will be enough to slow the momentum of the weakening.
  • We still consider the first rate cut likely in the late part of 2024, with November our current working hypothesis. However, as the RBA has been at pains to point out today, the future is unknown and there are risks to both sides.