MNI INTERVIEW: RBA To Start Easing With 50bp Bang - Economist

MNI (SYDNEY) - The Reserve Bank of Australia will start its easing cycle in February with a 50-basis-point cut to the 4.35% cash rate followed by a further 25bp reduction before pausing to assess economic data, a leading independent economist has told MNI. 

Saul Eslake, an economist with both public and private sector experience, told MNI the Reserve could act aggressively to lower the cash rate once it confirms inflation is moving sustainably back into the target band, in a manner similar to the Federal Reserve’s recent action. This would likely occur after the Reserve reviewed December quarter CPI due in January, he added, noting the RBA would act decisively to consolidate gains made in the labour market, a key driver of its monetary-policy strategy. 

“Once they are confident that inflation is sustainably heading back towards the target, then a bit like the Fed, I'd expect their priority to switch towards sustaining growth and employment, and one way of signalling they have switched their focus is by doing 50bp,” he argued.

RBA Governor Michele Bullock said following the decision to hold the cash rate at 4.35% on Tuesday that the board had not discussed a hike, while a shift to its communications had been considered. (See MNI RBA WATCH: Changed Messaging Considered In Hawkish Hold) 

Eslake said the RBA, like the Fed, had increased the cash rate 50bp multiple times during the early part of its hiking cycle. While cutting by 50bp would signal inflation was sufficiently contained, Bullock would need to back that with assurances the economy was on solid footing, he continued. The Bank would then ease the rate towards neutral, pausing to assess data, he added. 

The RBA last cut 50bp in May 2012 followed by a 25bp reduction in June as Q1 2012 CPI fell to 1.6% y/y from 3%. At the time, unemployment had risen 0.3 percentage points off its low to 5.2%.

NEUTRAL RATE

The RBA has consistently dodged questions over its neutral rate estimate, which Eslake argued was driven partly by the makeup of Australia’s largely variable-rate mortgage market compared to international peers. 

The Reserve will be watching closely the spread between the cash rate and real borrowing rates, which had widened since the pandemic, to determine the restrictiveness of the cash rate, he added, noting other central banks placed less importance on this measure. “What matters are the rates that borrowers, in particular mortgage borrowers, are actually paying,” he said, noting any estimate of neutral must take this spread into account. 

“I'm not troubled by the words ‘data dependent’ because understood properly, it doesn't mean they react to the latest inflation or employment numbers,” he added. “What it means is that those numbers influence the judgments they make about how events are going to unfold.”

MARKET PRICING

Eslake said market pricing, which expected a 25bp cut at the December meeting, was optimistic. “What will the Reserve Bank know in December that it didn’t know in November that would prompt them to start cutting rates then?” he questioned, noting November unemployment data will publish after the Dec 10 decision. 

While the RBA could be tempted to move should the Fed implement two further 50bp cuts and the Australian dollar strengthen above USD0.70, falling oil prices may keep the currency in check, he said.

The Australian dollar has strengthened about 3% to 0.688 since the Fed's cut.