RBA overnight index swaps markets have given a February 25bp cut a 65% chance, with a 3.6% cash rate expected by the end of the year. While the RBA has not published its neutral rate estimate, it includes a box within each set of forecasts that illustrate the tightness of financial conditions across a range of indicators. (See chart below)
The Board’s most recent communications were slightly dovish, but Langcake believes the RBA wanted simply to illustrate that it had avoided the worst-case scenario over shifting to an easing stance. (See MNI RBA WATCH: Board Holds, But Turns Slightly Dovish)
“That's good, but I don't think it actually changes the central or the baseline case of where things are headed,” he argued. “It just trims out a bit of the upside risk they were thinking about six months ago.”
TIGHT LABOUR
The Reserve would not want to see a repeat of November’s labour market data, which saw unemployment tighten to 3.9% and over 35,000 jobs added, he said. “When we only have GDP growth below 1% over the last year, [the labour market] is unusual – there’s your productivity problem right there.”
Langcake said the tight labour market and poor productivity growth will keep the RBA from cutting earlier. “Where are we really at in this cycle and how restrictive is policy? Or is this all just non-market sector labour demand dominating everything and the RBA just has to ride through that?”
Underlying and services inflation were also too high for the Reserve to consider easing in the near term, he added. “Especially when the labour market is beyond what we think of as its capacity,” he continued. “If we had inflation where it is currently, and the labour market was in the toilet, or very clearly headed there, then the RBA could say it was ahead of the curve and start cutting now.”