17 April 2024
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Are we’re getting into RBA rate cutting territory?

Peter Switzer
20 March 2024

As expected, the Reserve Bank wisely avoided another rate rise. This shows that Governor Michele Bullock might have learnt from her male predecessors, who regularly overtightened, held rates too high for too long or cut too low and then had to backtrack on promises/predictions that rates wouldn’t rise until some ‘silly’ point in the future.

That said, our central bank is highly regarded internationally, which shows you how hopeless others are! To be fair, despite their timing mistakes when it comes to rate cuts or rises, they did help our economy grow without a technical recession (i.e. two quarters of negative growth) for nearly three decades!

Of course, they weren’t alone but were helped by some good fiscal and population policies out of Canberra, our exporters and the spectacular growth of our best foreign customer, China!

But that was then, this is now. It’s good that the new RBA board has given out the message that they’re not mad crazy to raise rates again because the recent run of data says we could be living through the kind of economic slowdown the RBA and the Albanese government would’ve been praying for.

The SMH’s Shane Wright got it right when he said: “A six-word change in Reserve Bank language has given hard-pressed home buyers, struggling businesses and distressed renters a crack of hope.”

While Ms Bullock did say that “a further increase in interest rates cannot be ruled out”, she also said the board is “…not ruling anything in or out”. This means a rate cut is now being considered. The run of data will determine when, which is a good sign that rate rises might be over and now it’s time to guess when the first cut will come.

I’m hoping for a July cut after we see the March quarter economic data, which I think will be weaker than the December quarter of 2023. That showed economic growth had fallen to 0.2% in those three months, while the 12-months reading was a low 1.2%.

Meanwhile, the February CPI number was a promising 0.4%, taking the annual figure to a low 3.2%. Remember the RBA wants inflation in the 2-3% band, so we could be close. I say “could” because you can’t trust monthly data as it can be erratic.

That quarterly CPI is out on May 24 and will be a big day for rate worriers. The December quarter inflation reading was 0.6%, taking the annual inflation rate to 4.1%. We need the March quarter result to be a lowish 3% number to get the RBA keen on cutting.

That’s my view but what are economists saying?

Here’s Dr Shane Oliver at AMP’s view: “The RBA noted progress in reducing inflation and bringing demand back towards supply, but it continues to note that inflation remains too high, with concerns about growth in unit labour costs. We continue to see rates as having peaked, with rate cuts starting from around mid-year.”

And here’s what Craig James at CommSec has to say: “The Board has moved from a mild tightening bias to a neutral one… we continue to expect an easing cycle commencing in September (we have 75bp of rate cuts in our profile in late 2024 and a further 75bp of easing in H1 25, which would take the cash rate to 2.85%).”

Westpac chief economist Luci Ellis said this to the AFR: “The board considers that inflation is currently on track to return to target, but it is cautious because of the many uncertainties. Given the recent data flow and the shift in the RBA’s language, we continue to expect that the RBA is on hold until its late-September meeting.”

Data drops will determine what the RBA will do, and we see an important one on Thursday with our latest jobs report. The economists’ guess is 45,000 new jobs. If it comes in less and unemployment rises from the 4.1% level we saw in January, then a rate cut could become closer than economists are currently thinking.

I’ll be watching out for this number, even though I’m now in London, so watch this space!

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