RBA has little love for rate cut it just announced — analysis

So tentative was the central bank’s first reduction in official interest rates that it begs the question. How much support did the cut actually get around the central bank’s board table?

RBA governor Michele Bullock at its board meeting on Tuesday. Picture: Oscar Colman/NewsWire

So tentative was the Reserve Bank of Australia’s first reduction in official interest rates on Tuesday that it begs the question: How much support did the cut actually get around the central bank’s board table?

The RBA cut the official cash rate by 25 basis points to 4.10 per cent, its first reduction since 2020, a move that was widely anticipated by economists and money markets.

But when it came to explaining the rationale for the reduction, the Australian central bank was full of warnings about ongoing inflation risks, while governor Michele Bullock told money markets that bets on a few more cuts through the year need to be rethought.

“If monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range,” according to the board statement.

“In removing a little of the policy restrictiveness in its decision today, the board acknowledges that progress has been made but is cautious about the outlook,” the RBA board added.

So lacking in love for the interest-rate cut it announced, it might well be the case that the RBA has already finished easing policy settings after just one outing.

The RBA cut rates on Tuesday for the first time since 2020, a move that was widely anticipated by economists and money markets. Picture: Gaye Gerard/NewsWire

Bullock was blunt during the press conference that followed the decision, saying she wanted to “make it clear that today’s decision does not imply that further rate cuts, along the lines suggested by the market, are coming.”

Money-market pricing implies a few more cuts are likely this year, but Bullock was deliberate in her efforts to negate that view.

There have been repeated calls for the RBA to publish the votes of the board, something that has yet to be granted.

Bullock stopped short of saying the call to cut rates was unanimous, saying only that the debate involving the nine-member board, of which Bullock is the chair, represented just a “consensus” opinion.

The comment implied there was dissent at the meeting, and the outcome was indeed a tightrope walk.

In the RBA’s defence, certainty about the global outlook is as low now as when the Covid-19 pandemic first came onto the radar of policymakers.

There’s fear and loathing about the potential for a global trade war to shatter global growth, and lay waste to international supply chains while stoking inflation.

There’s also the problem that Australia’s job market is roaring, with monthly employment growth surging and workforce participation at record highs, as the unemployment rate remains at historic lows.

Household budgets are generally in good shape, with mortgage failures low, while most home buyers have managed to build up big home-loan repayment buffers in the event of a rainy day.

Despite the dominant narrative that consumers have been battered by rising costs and record interest-rate repayments, the reality is that consumers are starting to spend more, albeit cautiously.

There’s every chance that the combination of falling interest rates, retail discounting and high levels of employment produce a rapid surge in consumption growth that will sideline the RBA from cutting interest rates further.

A worst-case scenario would see the central bank raising rates again before too long in the event of resurgent inflation, further denting its already tattered credibility.

Bullock was anything but welcoming of the cut at her press conference, repeating over and over again that upside inflation risks remain.

It’s even conceivable that Bullock’s desire was for interest rates to remain on hold this month, and she was ignored.

Such events would be in keeping with recent moves to improve the working of the board, making it more democratic, while ensuring that it isn’t just a rubber stamp for the recommendations of the RBA’s inner circle.

Still, if she was overruled by the board, that may have left Bullock trying to explain a cut she had no love for.

To be sure, that’s all speculation, but Bullock will speak before parliament on Friday, and she may be quizzed on why the cut appeared to lack broad support.

What seems certain is that the RBA will be sidelined for some time yet, holding back relief to those struggling to pay off a typically expensive Australian mortgage.

Dow Jones Newswires