The RBA has revised down its CPI and GDP forecasts, particularly for 2024, and moderated its ‘tightening’ stance on the cash rate outlook.
March 8, 2024
The RBA will maintain the cash rate at 4.35 per cent following its February meeting.
The RBA has revised down its CPI and GDP forecasts, particularly for 2024, and moderated its ‘tightening’ stance on the cash rate outlook.
The RBA’s forecasts are consistent with potential rate cuts.
Assuming the forecasts are accurate, Australia’s first rate cut could occur either late this year or early 2025.
The cash rate will remain unchanged this month following the RBA meeting. However, the RBA has lowered its GDP and CPI forecasts for this year, albeit modestly for 2025, with a slight increase in the projected unemployment rate. Additionally, the RBA has softened (but not completely removed) its tightening bias.
The fact that the RBA has only slightly adjusted its stance on interest rates is unsurprising. We are currently experiencing an inflation rate of over 4 per cent and an unemployment rate of under 4 per cent (still near its 50-year low), indicating a focus on the upside risk to interest rates. However, if the RBA’s forecasts prove correct, the inflation rate should approach 3 per cent and the unemployment rate should exceed 4 per cent by the end of 2024, shifting the risks towards a rate cut.
The strongest argument for a domestic rate cut in the coming months is the outlook for global cash rates. Central banks in most peer economies are considering reducing interest rates, likely around mid-year.
Our cash rate does not necessarily have to align with global trends; domestic economic and inflation data are what matter. However, we are part of a coordinated economic cycle, largely driven by the recovery from COVID, suggesting that the domestic cash rate should correlate more closely with global trends. Recent data indicates that CPI is declining faster than anticipated. Yet, some inflation indicators have remained around 3.5 per cent since the latter half of last year, with annual producer price inflation also at about 4 per cent during that period, as was import price inflation.
This indicates the absence of a deflationary force in the pipeline. In its analysis, the RBA emphasised the ‘stickiness’ of domestically-driven cost inflation (labour costs, insurance, electricity). However, the next phase of inflation reduction may not be as smooth as what has been observed over the past year.
The unemployment rate is rising and is expected to increase further. However, indications suggest that a significant surge is unlikely. Economic growth was below average in H2 2023, a trend likely to continue into H1 2024, primarily due to the stagnation of ‘real’ disposable income growth.
Lower inflation and tax reductions will significantly mitigate this issue in the latter half of this year. Additional fiscal easing is probable. The global economy should be in a more favourable position by year-end if the anticipated interest rate cuts materialise as currently predicted by financial markets. Given the lower inflation and the high likelihood of global rate cuts, a domestic cash rate reduction seems probable. Australia currently has a lower cash rate and a higher inflation rate compared to its peers, indicating that rate cuts in Australia may follow those in peer economies.
There is also the prospect of improved economic growth in the latter half of the year, suggesting that rate cuts could commence either late this year or early in 2025.
Over the past 25 years, the cash rate has decreased by between 2 – 4.5 per cent during rate cut cycles. However, this cycle is distinct. The starting level of the cash rate was much higher in the 1990s and 2000s. The economic climate of the 2010s, marked by a slow global economic recovery from the GFC and domestically from the end of the mining boom, was more challenging than the current scenario. There is now a strong demand for investment (the need to build more homes, enhance infrastructure, and prepare for climate change).
Globally, governments are more inclined to utilise fiscal policy to bolster the economy than in the previous decade.
In recent months, financial markets have anticipated between 3 – 5 quarter percentage points of rate cuts in this cycle. The projected bottom of the cash rate in peer economies is broadly similar to that in Australia.
This suggests that the extent of the cash rate reduction could be significantly less than what has typically occurred over the past couple of decades.
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