Dr Shane Oliver, Head of Investment Strategy & Chief Economist at AMP, discusses the RBA meeting.
Key points:
- At its September meeting the RBA left the cash rate on hold at 4.35% as widely expected, leaving it unchanged for 10 months now.
- The RBA reiterated that it is “not ruling anything in or out”, but its statement and Governor Bullock’s comments continue to lean hawkish with more concern regarding too high inflation than rising unemployment and the RBA still seeing excess demand in the economy. Governor Bullock reiterated that “in the near term [the Board] does not see interest rate cuts.”
- We see rates as having peaked, with the first cut coming in February next year. However, despite RBA guidance, a rate cut is still possible by year end if unemployment rises more sharply, underlying inflation falls more sharply and/or share markets have a sharp fall on global recession worries.
The RBA holds rates at 4.35% and remains cautious
In leaving rates on hold the RBA noted that high rates are continuing to work to rebalance demand and supply, inflation has fallen substantially from its peak, growth has been weak and there are uncertainties regarding the outlook for consumer spending and the global outlook. However, it also noted that inflation is still too high and sticky particularly in services, it does not see underlying inflation returning to the mid-point of the target until 2026, that demand remains in excess of supply in the economy, labour productivity is still only at 2016 levels and the labour market remains tight.
The RBA retained its comments that its “not ruling anything in or out”. However, while the RBA did not explicitly consider a rate hike because not enough had changed since the last meeting, its language continues to lean mildly hawkish with concerns about ongoing excess demand, still too high inflation and a slower decline in trimmed mean inflation than expected earlier this year. And Governor Bullock noted again that “in the near term [the Board] does not see interest rate cuts.” Note that at the August post meeting press conference Governor Bullock said the near term meant “by the end of the year and the next 6 months.”
The RBA reiterated that “policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range”, which allows a bit of leeway in terms of when the RBA will first start cutting. In other words, the RBA, like other central banks, won’t need to wait until underlying inflation is in the target range before starting to cut.
While August data due tomorrow will likely show headline inflation falling to around 2.7%yoy due to government “cost of living” relief, unless we see a sharper than expected fall in underlying inflation this is unlikely to impact the RBA’s thinking as the RBA sees it as temporary because once the measures end its August SOMP forecasts show headline inflation bouncing back above the target range next year before converging to underlying inflation. In particular, the RBA noted that “while headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high.” So its focus will remain on the underlying inflation rate as measured by the trimmed mean, not the headline inflation rate.
Overall, absent much higher unemployment or lower underlying inflation than forecast by the RBA or a financial shock, a rate cut still appears to be fair way off based on the RBA’s current thinking.
Our view remains that the next move in rates will be down with the first cut in February
Our assessment remains that the RBA’s cash rate has peaked. There are seven reasons why a rate cut is getting closer: monetary policy remains restrictive; the full impact of past rate hikes is still feeding through; recession risks are high as indicated by the ongoing slump in real household spending per capita; slowing population growth will add to the risk of weaker economic activity ahead; forward looking jobs indicators warn of a significant further rise in unemployment; wages growth has peaked which will slow underlying services inflation; and just as global inflation and interest rates led Australian interest rates up starting in 2021-22 they are now pointing down for Australian interest rates, albeit with a lag.
Source: Bloomberg, AMP
The US experience with hotter inflation earlier this year giving way to cooler inflation in the last five months and worries of a sharp deterioration in the labour market and recession – resulting in the Fed pivoting to a 0.5% rate cut last week – suggest that the same thing could happen here. Particularly given that the actual interest rates borrowers pay here have gone up far more than in the US and the trend in unemployment in Australia, which has seen it rise to 4.2%, is not that different to that in the US where it’s risen to 4.3%. More broadly, weakening economic indicators in Europe and China warn of weaker global growth ahead and a further easing in global inflationary pressures which will impact Australia.
It’s worth noting that our Australian Pipeline Inflation Indicator points to a further fall in inflationary pressures ahead – and our Indicator does not take account of government “cost of living” relief!
Source: Bloomberg, AMP
In terms of the timing of RBA rate cuts our base case is for a start to cuts in February as it will likely take more than one good quarterly CPI release to see the RBA get “confident that inflation is moving sustainably towards the target” and so it will likely wait for the December quarter CPI release in late January before starting to cut in February. However, as noted above, a cut by year end is possible despite the RBA’s calendar guidance against it but this would require some combination of much higher unemployment, lower inflation and/or a financial shock.
In terms of what the RBA should do as opposed to what we think it will do, given the US experience it should now be starting to give consideration to a cut in interest rates as it risks much higher unemployment and inflation falling below target given the lags with which monetary policy impacts the economy.
Ends
Important note: While every care has been taken in the preparation of this document, neither National Mutual Funds Management Ltd (ABN 32 006 787 720, AFSL 234652) (NMFM), AMP Limited ABN 49 079 354 519 nor any other member of the AMP Group (AMP) makes any representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. This document is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.
