MNI: RBA Seen Cutting More Slowly Than Other Central Banks

The Reserve Bank of Australia is likely to cut rates slower than its international peers after a more comparitively sluggish tightening cycle, a former Reserve Bank of Australia staffer and economists told MNI.

The neutral level of interest rates is likely to remain higher than elsewhere in the developed world once inflation returns to the 2-3% target, said Andrew Barker, senior economist at the Committee for Economic Development of Australia, and a former economist at the Organisation for Economic Co-operation and Development and at the Productivity Commission.

“It seems we might manage to bring inflation under control without pushing rates as high as those other countries,” he explained. “That does mean that in the longer term, there's no reason to think we would have lower equilibrium rates than those other countries. In fact, strong population growth, stronger potential economic growth and the slightly higher 2-3% target means we need higher nominal rates to get the same real rate.”

The RBA declined to detail its neutral cash rate predictions in February when it published its updated Statement on Monetary Policy alongside the Board’s decision to leave the cash rate at 4.35%. (See MNI RBA WATCH: RBA Bases Forecasts On 3.9% Cash Rate By Dec) The post-pandemic economy has led the Reserve to abandon many of its economic assumptions and alter its models. (See MNI POLICY: RBA Shakes Up Forecasting Framework) The Bank expects CPI to reach 3.1% by June 2025 from its current 4.1% y/y in Q4.

“We'll have to see how the economy tracks but we're certainly not expecting rate cuts in the next six months,” Barker added. “Because we haven't gone as high, it’s about being patient, and services inflation has been quite sticky here as in those other countries. But we'd expect to see cuts elsewhere sooner.”

RBNZ's Chief Economist Paul Conway told MNI last week market expectations for a mid-year rate cut in New Zealand were too optimistic. Australian dollar overnight index swaps markets have priced in a 25bp cut by the Aug 5-6 meeting.

STALLING DISINFLATION

The Reserve will take time to become comfortable with the pace of inflation’s fall before considering rate cuts, said Sean Langcake, head of macroeconomic forecasting at BIS Oxford Economics and a former RBA economist, adding that the next few CPI prints may show disinflation stalling. While the RBA’s next move will likely be a cash rate cut, it remains concerned about rental and services inflation, he added.

“I'm not surprised if the markets are a little directionless, because we're more into the art-than-science of central banking and when it might be right to ease conditions,” he added. “You could make a case that it should be early in the second half of this year to get ahead of the curve, but I think the reality is it will be a bit more around November.”

COUNTER POINT

Future neutral rate predictions were difficult and a number of countervailing indicators suggest Australia will follow other developed countries back to historical low levels that were close to 0% real rates due to low productivity, said James Morley, professor of macroeconomics at the University of Sydney.

While rates will fall more slowly in Australia than in other economies, the RBA could still be prompted to move sooner than otherwise should inflation fall faster than expected and the U.S. Federal Reserve begin cutting. "But how far? The RBA will be trying to figure out what the neutral rate would be," he explained. "Let's say 1% neutral real rate and then 2.5% midpoint is the target. Now we're aiming for 3.5%. There's not a massive range to cut, unless there's a recession and it needs to go below neutral."

The RBA will deliver its next cash rate decision on March 19.