MNI INTERVIEW: RBA Could Shift Tone Rapidly - Ex Economist
MNI (SYDNEY) - The Reserve Bank of Australia’s tone on rate cuts could shift rapidly over the next two months should unemployment spike or consumer spending disappoint, with a 25% chance of a reduction to the 4.35% cash rate at either the November or December meeting, a former RBA economist told MNI.
“February is probably the base case for things kicking off, but there’s two meetings before then,” said Justin Fabo, founder and head of research at Antipodean Macro and former head of international financial markets at the RBA, noting the Reserve’s board had not discussed rate hikes at its September meeting. (See MNI RBA WATCH: Changed Messaging Considered In Hawkish Hold)
While Governor Michele Bullock has maintained a hawkish stance this year, stating cuts would likely not occur until 2025, markets have priced in a 9% chance of a move lower at the Nov 5 meeting and a 32% chance of a 25bp cut at the Dec 10 session.
“My guess is that there is no way anyone internally [at the RBA] is seriously thinking about a rate hike,” he added. How consumer spending performs over the remainder of the year will be a key focus for officials, he added. (See MNI POLICY: RBA Watches Data For Downside Inflation Risk)
“I think they're feeling much more uncertain about that and why does that matter? Well, it means that businesses at the consumer level have less ability to keep putting prices up.”
The board also raised concerns over wages in the September decision, illustrating the RBA’s focus on the consumer, Fabo continued. “These central bankers can change very quickly in terms of what they're placing their emphasis on,” he added, pointing to recent NAB and Melbourne Institute inflation data showing continued disinflation.
“The RBA would be noticing that and saying, ‘if we get lucky, our story is going to change very, very quickly.’”
The Australian Bureau of Statistics will publish Q3 CPI data Oct 30, while household spending will be updated within the next National Accounts results due Dec 4.
TERMINAL RATE
Fabo believes the RBA will cut about 100-130 basis points over 2025, which would leave the real cash rate slightly positive, noting the Reserve had estimated nominal neutral in the high threes. “That's a good starting point for thinking about where at least neutral is,” he added. “Obviously, if things turn pear shaped, then that terminal rate will be much higher than that.”
Fabo pointed to commercial property and private equity risk that had built up over the low interest-rate era, alongside geopolitical issues, that could impact real growth over the coming year.