MNI: Australian Rate Cuts To Be Gradual- Former RBA Economists
MNI (MELBOURNE) - The Reserve Bank of Australia could ease again in May after studying Q1 CPI data should the board decide to cut the 4.35% cash rate when it meets Feb 17-18, but further easing is unlikely until half way through the second half, former RBA officials told MNI.
Inflationary risk remains to the upside, said John Simon, adjunct fellow at Macquarie University and head of the economic research department at the RBA between 2014-2024, who judges the market's implied pricing of a 91% likelihood of a rate cut next week to be overly optimistic. But, he noted, public, political and market expectations amid the uncertain global economic outlook will weigh on the side of easing as Governor Michele Bullock and her board members meet next week.
"If they do cut, it would be to take some of the steam out. I would think they would lean heavily on what are the expectations for the future, if they can stomach it, they could go into something that looks like forward guidance," he continued, noting the current cash rate level was barely restrictive. "They might do two cuts, they certainly wouldn't do it back to back."
The RBA would wait until May to ease further if it decides to cut next week, and further easing would be unlikely until after September, given that headline inflation will mechanically spike in the second half as government energy subsidies roll off, Simon said.
PRESSURE BUILDS
Many of the board members are likely to prefer to hold in February, though pressure for a cut could sway them towards easing next week, said Bob Gregory, emeritus professor at the ANU’s Research School of Social Sciences, who served on the RBA board between 1985-1995.
"I think the bank will reduce, but it will reduce by the smallest amount it can get away with,” he said, pointing to the resilient labour market.
Despite Q4's 0.5% q/q trimmed mean inflation, Gregory believes the real economy has not changed significantly enough over the last two months to warrant a cut. The board is likely to view any 25 basis point decrease this month an insignificant first step that will give it more time to monitor the economy. It is also likely to stress uncertainty, he added.
Other former RBA staff have been less sure of a reduction this month, pointing to the resilient labour market. (See MNI: RBA To Update Outlook, Cut Not Guaranteed - Ex Economists) Gregory in October told MNI the RBA would likely begin to ease in Q1 and reduce the rate to 3.5% over 2025. (See MNI INTERVIEW: Global Easing To Drive RBA Cuts To 3.5% In 2025)
FUTURE FORECASTING
The RBA’s job is to forecast and set policy based on what it thinks will happen in future, Gregory noted. “The big game is predicting economic outcomes one year or one-and-a-half years ahead. Predicting the next year looks as though it's going to be much harder than we would have thought,” he continued, pointing to U.S. President Donald Trump’s trade policies.
"Unless there is a really bad scenario coming up, why reduce interest rates? Just wait a little bit longer. On the other hand, if you think unemployment is going to increase significantly because of what's going on in the world, then the earlier you start on interest rate reductions the better."