Australia’s RBA poised to cut interest rates for first time in four years

SYDNEY: Australia’s central bank, the Reserve Bank of Australia (RBA), is facing a pivotal decision: whether to cut interest rates for the first time in four years. While a majority of economists and traders anticipate a 25 basis point reduction in the cash rate to 4.1%, a move that would be the first since November 2002, the RBA board is also considering potential inflationary pressures. These include uncertainties stemming from global trade instability and the possibility of increased government spending in the lead-up to the election.

The Prime Minister, Anthony Albanese, could benefit from such a cut, which could offer a boost as he seeks re-election. Money markets currently suggest an approximately 85% probability of a rate cut. However, factors like increased consumer spending, driven by tax cuts and government subsidies, along with the unknown impact of US trade policies, might persuade policymakers to exercise caution.

The RBA’s current policy stance is comparable to those of other major central banks, as it did not implement as aggressive tightening measures in 2022-2023. The board has been aiming to maintain labour market gains while simultaneously bringing inflation under control, a strategy that has drawn some criticism.

Several factors support a rate cut. Inflation is decreasing at a faster rate than initially projected, according to recent data. The RBA is likely to reflect this in its upcoming quarterly macroeconomic forecasts, released concurrently with the decision. Furthermore, the economy has slowed considerably since 2023. An economist suggested that the data strongly supports a rate cut, given the sharp drop in inflation and the need to revise existing forecasts.

Despite the likely rate cut, policy discussions are expected to be complex. The RBA’s official statement and Governor Michele Bullock’s press conference are anticipated to lean towards a hawkish tone. Economists predict that the RBA’s latest inflation forecasts will show downward revisions for its closely monitored trimmed mean gauge. Some analysts believe that this will not be a large cutting cycle, with a maximum of 100 basis points expected. Moreover, there are indicators of “disinflation durability,” with cooling price pressures in areas like rents, new home costs, and insurance. Consumer inflation expectations, as measured by the Melbourne Institute, have reverted to pre-COVID levels, and business capacity utilization rates are also declining.

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However, there are also strong arguments for maintaining the current interest rate. Consumer spending has increased, fuelled by income tax cuts, government cost-of-living subsidies, and decreasing inflation, all of which have boosted household disposable income. Economists estimate a 20% probability of the RBA choosing to hold the current rate at a 13-year high of 4.35%.

Additional factors supporting a cautious approach include the Australian dollar’s more than 5% decline since the US election in November, which has increased the cost of imported goods. Additionally, Australia’s unemployment rate remained low in December, while job vacancies remained high, implying the potential for a further decrease in unemployment and a rise in compensation. Further information will become available from government wages data due on Wednesday and the January employment report released the following day. Governor Bullock will offer commentary on these key sets of data during her testimony before a parliamentary committee on Friday.

Finally, there are concerns that increased government spending in anticipation of the general election (due by May 17) could further fuel inflation. Both state and federal governments are already spending heavily, keeping demand high and complicating efforts to achieve the final phase of bringing inflation under control. One strategist feels that there isn’t an immediate need for the rate cut and that it may be more appropriate later in the year.