Reserve Bank gives little hope of interest rate cuts before May

The RBA gives little hope of interest rate cuts before May and warns of scenarios where it may need to lift rates again, its November meeting minutes show.

Reserve Bank of Australia governor Michele Bullock. Picture: Martin Ollman

The Reserve Bank has given little hope of interest rate cuts before May and warns of scenarios where it may need to lift rates again – or keep them at current levels for a “prolonged period”.

With the economy evolving in line with the RBA’s forecast that inflation will fall to the 2 to 3 per cent target band in a reasonable time frame without widescale job loses, and those forecasts predicated on interest rates being steady for the near future, the monetary policy board saw “no immediate need to change the cash rate target,” according to the minutes of its November board meeting.

However, given the already long period in which inflation had been above target, the board had “minimal tolerance to accommodate a more prolonged period of high inflation, even if this occurred because of factors that constrained the economy’s supply capacity”.

Relative to their negative assessment of the labour market outlook – whereby board members said the risks “might have diminished somewhat” – the minutes show they were less confident in the staff forecasts of underlying inflation coming back to the target band by 2026, according to NAB.

Key uncertainties for inflation identified in the minutes included the supply capacity of the economy, productivity growth, and how restrictive policy actually is.

Policy interest rates in most other advanced economies were still assessed to be restrictive relative to those central banks’ published estimates of neutral rates, and more restrictive than Australia’s.

The minutes said the degree to which Australia’s monetary policy was restrictive “remained uncertain and broader financial conditions had eased somewhat over preceding months”.

Board members acknowledged that inflation may fall faster than forecast, perhaps in response to emerging signs that rental housing markets in many cities were moving into better balance or because the energy rebates have a more pervasive effect than factored in.

They said the energy rebates might have a broader effect on inflation expectations or price indexation than staff expect.

NAB head of market economics Tapas Strickland.

However, while noting that this could warrant a rate cut, they “would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable”.

“Overall, the discussion highlights that a rate cut as soon as February looks very unlikely given policy is only modestly restrictive and the uncertainties the RBA is grappling with are unlikely to be resolved that quickly,” NAB head of market economics Tapas Strickland said.

Mr Strickland said the minutes are broadly consistent with his view that the RBA, led by governor Michele Bullock, will start cutting rates in May, but implied some further loosening in the labour market and two quarterly inflation prints consistent with further easing in inflation pressures, would be needed.

He said the RBA’s wide range of discussion of scenarios, whereby it may have to hold for longer, raise or cut rates “reveal how the board’s thinking about risks”.

However, there were also scenarios in which inflation fell faster than forecast, including in response to emerging signs that rental housing markets in many cities were “moving into better balance” or because the energy rebates “have a more pervasive effect than factored in”.

The minutes discussed a range of risks from abroad that “could result in the forecasts being materially wrong and therefore have important implications for monetary policy”.

ANZ head of Australian economics Adam Boyton . Picture: Sean Davey

These included the potential for major changes in US economic policy following the presidential election, the prospect of the size or composition of the stimulus package foreshadowed by Chinese authorities differing from expectations, and the more general risk of unsustainable growth in global government debt.

“Members agreed that it was not yet possible to factor in events such as these, given pertinent details were unknown and still largely unpredictable, but that this would need to be done if these risks eventuated,” the minutes said.

ANZ saw “guarded references” that “could imply the board is opening the door to a policy easing”.

“That said, any easing in early 2025 would likely require a moderation in trimmed mean inflation, which we expect,” ANZ head of Australian economics Adam Boyton said.

He highlighted the use of the word “immediate”, in the context of why the RBA did not see a need to change the cash rate target at its November meeting, particularly the minute also noted that it was “important to remain forward looking, avoiding an excessive reliance on backward looking information that might lead the board to react too late to a change in economic conditions.”

CBA head of Australian economics Gareth Aird.

“We still see the Reserve Bank’s first rate cut in February 2025,” Mr Boyton said.

“The balance of the activity data had suggested the risks of a later start to the easing cycle were rising. The tone in the minutes today tempers that risk a little.”

However, CBA said the minutes “create more uncertainty over the RBA’s reaction function”.

Whereas the August meeting minutes said “members noted that it was appropriate to continue placing somewhat greater than usual weight on the flow of data”, the November minutes said “it is important to remain forward looking, avoiding an excessive reliance on backward looking information that might lead the board to react too late to a change in economic conditions”.

“This is the first time this language has appeared in recent RBA communication,” CBA head of Australian economics Gareth Aird said.

“Taken together, the shift today suggests the board will place more weight on the economic outlook rather than just some of the lagging incoming data.”

“However, the November meeting minutes make it unclear just how forward looking the board is willing to be as compared with still being highly dependent on backward looking data.”

Assuming that the 0.8 per cent-a-quarter rise in the September quarter trimmed mean CPI wasn’t “good” enough, the board won’t have visibility on more than one “good” quarterly CPI until the May board meeting at the earliest, yet inflation data are “backward looking”.

“We take it to mean that if underlying inflation is falling in line with the board’s latest forecasts or faster, but that all other economic indicators were not weaker than the RBA’s most recent forecasts, implied the board would not cut the cash rate until May at the earliest,” Mr Aird said.