MNI: RBA To Update Outlook, Cut Not Guaranteed - Ex Economists
MNI (MELBOURNE) - The Reserve Bank of Australia will update its view on the labour market, output and provide stronger guidance for future policy when the board next meets over Feb 17-18, former economists told MNI, noting a 25 basis point cut to the 4.35% cash rate was not guaranteed despite market expectations.
Blair Chapman, senior economist at employment website Seek and a former RBA research economist and lead analyst, said the RBA’s decision in February will hinge on its updated non-accelerating inflation rate of unemployment (NAIRU) estimate, giving a cut between a 70-80% chance. Markets have priced in a 92.7% chance of a cut at February's meeting, following Wednesday's lower than expected Q4 0.5% q/q trimmed mean print.
“If [NAIRU]'s closer to Treasury’s [4.25% estimate] or even a little bit lower, then the labour market is not being as inflationary as they previously thought, I think it really comes down to that," he said, pointing to the RBA's last quoted 4.5% estimate. The Reserve could justify a cut in February, but this would accompany an altered view on employment and output, he added, noting the institution’s caution meant current market pricing was too high.
Martin Eftimoski, an RBA economist between 2017-2021, said Q4's inflation print will push the Bank to readjust its timeline when it releases a fresh set of forecasts alongside the Board's decision and could usher in a wider shift in communications that provided more easing guidance. He believes, while a cut in February would not surprise, the Reserve will likely wait until April or May.
“This is the first decision round where I believe this is live, but it could go either way,” he noted. “Having fought so very hard to tame inflation, where the labour market is very resilient, where wages growth is slowing, but not completely muted, where GDP growth is weak but not terrible, and there's so much international uncertainty, and the [Australian dollar] is so weak against the U.S. dollar, there's a lot of reasons to be reticent and give yourself the option, but not the obligation, to react to that.”
The Reserve does not like rapid policy direction change, he added, noting it was not a “risk-taking organisation.”
“There's no such thing as too late for the RBA. They have 425 basis points of powder in the keg and the notion that the Reserve can be late to the party is laughable,” he added.
Political and social pressure, however, could still lead the Bank to cut in February, he continued, pointing to the Federal election that must be held before May 17.
INFLATION SURPRISE
Tim Robinson, senior research fellow at the Melbourne Institute of Applied Economic and Social Research at the University of Melbourne and former RBA economist, noted policy could be less contractionary in the short term, giving a February cut a more than 50% chance. However, there was little risk for the RBA if it holds and waits for further wages data, he added. (See MNI INTERVIEW: Market Overestimating RBA Feb Rate Cut Chance)
Robinson has argued previously that Australia's low productivity growth would make the RBA cautious. (See MNI: Low Productivity To Extend RBA CPI Timeline- Ex Staff)
“It’s quite surprising how resilient the labour market has been to the contractionary monetary policy. As has been widely discussed, higher non-market jobs [e.g. in health care] have been an important part of this resilience,” he added, noting the Wage Price Index, due the day after the February meeting, will need to slow further to be consistent with the inflation target.
But a pause now could increase expectations of more substantial easing in the near term, he added. “On the other hand, [Wednesday]'s numbers were better than they expected in [the RBA's November forecasts]. I tend to think they probably will ease but also emphasise in the communication that it will be gradual and data dependent going forward.”
Services inflation, a key RBA focus, remained elevated in Q4 at 4.3% y/y, noted Robinson, adding the Reserve will focus strongly on the components underlying disinflation. “But some components, such as rents and insurance, did moderate,” he added.