MNI: RBA Rate Cut Talk Premature - Ex Staff

The Reserve Bank of Australia is likely to hold its cash rate steady at 4.35% in 2024, or move 25bp higher, with cuts this year highly unlikely despite market pricing, according to former bank officials.

While markets have priced in interest-rate cuts starting by the June 17-18 meeting, former RBA staffers told MNI the Reserve will aim to keep a strong hold on inflation throughout the year.

Luke Hartigan, former RBA economist and lecturer at the University of Sydney, noted growth remained relatively strong with no recession in sight. “Annual GDP growth is still at a ‘healthy’ 2%, that’s still ok – I don’t see any upside risk so the cash rate will likely hold where it is for the year,” he noted.

The RBA last hiked in November, however, the overnight index swaps market swiftly priced in 2024 cuts following the Board’s December decision to hold the rate steady.

“The banks’ forecasts have inflation returning to target by end of 2025, so there’s no reason to cut unless there’s a significant deterioration in growth or inflation falls faster than expected," Hartigan argued. "But considering we are starting to see a pickup in wages growth and services inflation has proved sticky, we need more observations and [services inflation] won’t fall as fast as people expect."

While in the U.S. the Federal Reserve is moving towards cuts, it has achieved its inflation goal, unlike Australia, he added. Fed cuts will not precipitate RBA action, he commented. “The unemployment rate is still sub-4%, amazing by historical standards."

December 2024 OIS is currently 70bp lower than its late October 2023 level, softening somewhat in line with U.S. OIS pricing.

A former RBA official told MNI the mid-year cuts narrative priced in by the market “feels like a Fed trajectory, not an RBA trajectory.” He said the Reserve remained in watch-and-wait mode, and “upside scenarios” for the cash rate existed.

INFLATIONARY TAILWINDS

While monthly inflation fell to 4.3% y/y this month, slightly faster than market expectations, rent, housing, services and immigration still represent significant inflationary tailwinds. The federal government’s introduction of the stage three tax cuts in July may also provide an additional impulse, however, Treasurer Jim Chalmers noted this week any price rises were "baked into" Treasury forecasts. The Australian Bureau of Statistics will publish Q4 2023 inflation results Jan 31.

Peter Tulip, chief economist at the Centre for Independent Studies and a former senior research manager at the RBA, said the Reserve will likely hold rates steady at its next Feb 5-6 meeting, though an increase would be better policy. “I think surprises that push rates up during 2024 are more likely than surprises that push them down,” he noted. “It’s a 60/40 balance. I think rates will probably go up this year, but I’m always surprised.”

Tulip in August called on the RBA to hike further, ahead of its November call. (See MNI: Rate To Plateau, Despite Strong Inflation - Ex-RBA Staff) He recently told MNI changes to the bank’s governing document, which will shift its inflation target to the middle of the 2-3% band, could add upward pressure on the cash rate. (See MNI: Updated RBA Goals To Push Hawkish Stance - Ex Officials)

Hartigan noted the changed makeup of the RBA’s decision-making body will have a more significant impact on rates this year than shifting the inflation target 50bp lower. “Having more economists on the committee able to challenge the Bank and engage them will fundamentally change how rates decisions are made,” he said. “There should be greater interaction between board members and staff, which was not really the case before.”

The refreshed committee, part of the wider RBA reform, will likely form mid-year.