MNI INTERVIEW: Global Easing To Drive RBA Cuts To 3.5% In 2025
MNI (LONDON) - The Reserve Bank of Australia will likely look to cut the cash rate by 25 basis points in Q1 due in part to the changed international situation and easing measures by peer central banks, with the terminal rate to reach about 3.5% sometime in 2025 driven strongly by the Federal Reserve’s reductions, a former board member told MNI.
Bob Gregory, emeritus professor at the ANU’s Research School of Social Sciences, who served on the RBA board between 1985-1995, cautioned against placing too much emphasis on the Reserve’s neutral interest rate estimate when considering how far the RBA may cut in 2025, noting the concept was likely a more long-term indicator.
“It doesn't really loom large on the RBA’s day-to-day decisions,” he said, noting the model was more useful when considering where the cash rate may fall three-five years out. The market should instead watch the U.S. Federal Fund’s rate outlook when considering where Australian rates were headed, Gregory noted. “I'm not a great believer in sudden big reduction in interest rates, unless we get inflation rates well below the target range,” he added.
TERMINAL RATE
The cash rate would likely land at about 3.5% sometime in 2025, he argued, adding a lower rate was unlikely outside of a sudden crisis that caused unemployment to spike. “If they achieve 2.5% inflation the interest rate is not going to be very much lower than it is now,” he continued. “I think there's a bit of excessive optimism in some circles as to how far the rate might fall.”
Market pricing has the cash rate at 3.24% by December 2025. Recent communications by the RBA Governor Michele Bullock have stressed uncertainty within the Reserve's forecasts, noting the board refused to rule out further interest rate hikes at the last meeting. (See MNI RBA WATCH: Changed Messaging Considered In Hawkish Hold)
A prominent Australian economist last week noted the RBA could look to ease in February with a 50bp cut due in part to the gap between the cash rate and that paid on existing loans. (See MNI INTERVIEW: RBA To Start Easing With 50bp Bang - Economist)
However, Gregory said such a move could be taken as panic. “When interest rates change, monetary authorities ought to be thinking about where the economy is going to be in 18 months to two years, which is why, short of a very large unexpected increase in unemployment, I don’t think we are going to get big sudden changes,” he added. “But, as the deputy governor emphasized in a recent speech, forecasting is subject to larger errors than most economists believe."