MNI: RBA To Hold Rates Despite Soft Data - Ex Staff

Recent soft data has iced further rate hikes, but uncertainty – particularly on future productivity growth – could still see the Reserve Bank of Australia leave the cash rate steady at 4.35% over 2024, former staffers told MNI.

Jonathan Kearns, former head of the RBA’s financial stability department and now chief economist at Challenger, said recent labour metrics contained noise and could give those wanting near-term rate cuts false hope. "Markets assume the RBA has done with rate hikes and is on a cutting path from here, but I think that’s kind of ambitious,” Kearns added, noting the RBA will consider the recent unemployment result to be in line with its forecasts.

Australian unemployment printed at 4.1% in January, 10 basis points higher than market expectations. Employment growth, however, printed at only 500, much lower than the 25,000 jobs forecasted. The RBA assumes unemployment will rise to 4.4% by mid-2025, as CPI reaches 3.1% y/y.

“The hope that we could cut wages growth and bring inflation back down, with the unemployment rate only about 4.25%, as the RBA previously forecast, was a bit ambitious,” Kearns told MNI. “We're notionally not that far away from that unemployment rate this cycle and I suspect there needs to be a little bit more unemployment if we're to get inflation back to 2.5%.”

Callam Pickering, APAC senior economist at employment website Indeed.com and former senior analyst at the RBA, said January’s labour market proved much weaker than expected. Employment had proved resilient over the last 12 months, but strain had begun to show, he added.

The recent data suggested the RBA may have to rethink the labour market. "It might be a little bit weaker than we thought," he noted, adding the Reserve will likely not hike again this cycle unless something fundamentally shifts.

Governor Michele Bullock struck an agnostic tone when the board delivered its latest call to hold the cash rate steady last week, noting hikes or cuts could occur depending on data. (See MNI RBA WATCH: RBA Bases Forecasts On 3.9% Cash Rate By Dec)

While the Reserve's messaging may turn slightly dovish, cuts will likely not occur until December at the earliest, Pickering argued. "I think, given the way the economy is headed, and where the risks to the economic outlook lie, there will be conversation around rate cuts at some point this year, whether this year or next year," Pickering added. "There is enough weakness with regards to household spending. Inflation is probably going to head towards the RBA's target a little bit ahead of schedule."

PRODUCTIVITY A RISK

The RBA’s assumptions on productivity represent the greatest risk to its forecasts and the future path of the cash rate and inflation, the economists agreed.

Kearns noted the Reserve had banked on productivity returning to pre-pandemic norms, but these may have shifted. Productivity growth was also sluggish before the pandemic, he added. International trends had shown the underlying rate of technological or skill improvement delivered productivity growth of about 0.5% rather than the 1% the RBA assumed Australia will experience in future, he added.

"That poses a risk for what wages growth can be sustained to get inflation to 2.5%," he said.

Pickering noted productivity was difficult to forecast, but assuming it will return to pre-pandemic levels represented a significant risk to the RBA's economic outlook. "It's one of the things that has the biggest likelihood to miss, just because the economy itself isn't operating as usual," he commented.

"Disruptions still exist and things are different. It's quite possible productivity growth deviates from its long-term trend over the next three or five years, then the relationship between wages and inflation shifts."