RBA rate cuts still six months off

Interest rates are still more likely to fall than rise, but the Reserve Bank seems no closer to cutting than it was three months ago

Reserve Bank Governor Michele Bullock during a press conference following the announcement that interest rates would stay on hold. Picture: Nikki Short

The Reserve Bank delivered another hawkish hold as expected after Tuesday’s meeting but those looking for interest rate cuts to begin in February may need to rethink their view.

Three months ago the central bank aggressively pushed back on market expectations that it would start cutting by the year’s end. Indeed it continued to consider the case for another rise.

At the time, RBA governor Michele Bullock said market pricing of interest rate reductions by the end of the year “doesn’t align” with the board’s thinking about the outlook for monetary policy.

That led money market pricing on the first rate cut to shift out from December to February.

Economists were already coalescing around February as domestic inflation proved stubbornly high.

In September, the RBA board’s messaging shifted considerably in a dovish direction.

It stopped explicitly considering the case for another rate rise, further reinforcing expectations that cuts would get under way in February.

But employment data since then has been much stronger than expected, economic demand indicators have shown tentative signs of responding to tax cuts and subsidies, and underlying inflation has remained too high, particularly in the services sector.

With unemployment figures staying lower than expected and inflation data not providing the downside surprise some economists were looking for, market pricing for the first cut recently shifted to May.

In her post-meeting press conference on Tuesday, Ms Bullock said market pricing was now “on message” with what the board thought about the interest rate outlook.

“I think that the market is actually reasonably on message about what we’re saying here, which is that we are not at the moment in a position where we can sustainably say inflation is going to be back in the band, and we want to be more convinced of that,” she said.

“And I think what the market is reflecting is that they understand that point of view, and the risks are balanced. We don’t want to say we’re ruling one or the other out (cuts or hikes), because we … just want to make sure that we have got inflation continuing to come down.

“So we just need to be convinced that that’s what we’re delivering – and I think that’s exactly what the markets have factored in.”

So while Ms Bullock has indicated that the board is now broadly happy with market pricing, she has also indicated that rate cuts are still six months away.

Moreover, she said rates needed to “remain restrictive for the time being.”

The jobs market “remains tight” and while labour market conditions have been “easing gradually”, some indicators there have “recently stabilised”. So the jobs market may have stopped easing.

“The unemployment rate has been close to 4.1 per cent for some time now, the participation rate remains at record highs, vacancies are still elevated, and average hours worked is steady,” Ms Bullock said in her post-meeting press conference.

“Survey measures continue to indicate that labour availability is constrained, wages growth has continued to ease, but still generally above rates consistent with inflation targets given the weak productivity growth.”

The post-meeting decision statement also said the RBA expected household consumption to increase from the second half of this year as income growth picked up, and noted “tentative evidence of an increase in spending in the September quarter”.

It did warn of a “risk that any pick-up is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market”.

However, Ms Bullock all but ruled out a sudden deterioration in the jobs market or a recession.

“There sometimes can be quite sudden deterioration in the ­labour market,” she said.

“We’re not predicting that on this occasion, because we’re not predicting a big recession.

“It’s also true though that vacancies remain quite elevated, and we do look quite different than many countries overseas at the moment, some countries who’ve had quite restrictive monetary policy have seen quite substantial rises in unemployment, and they actually feel that they’ve got an output gap now (as) supply is actually above demand.

“So that’s the reflection of what they are seeing in terms of their demand and supply balance.

“We still don’t think we’ve got that yet and, quite frankly, I have to say an unemployment rate of 4.1 per cent, if you’d said pre- Covid we could have that, I wouldn’t have believed you.

“So it’s a remarkable outcome. And yes, we’re watching, and it is softening. But I don’t see a massive sharp turnaround.”

HSBC chief economist Paul Bloxham said rate cuts were “still a long way off, if they come at all”.

“Core inflation is still too high, as services prices are sticky, and though growth has slowed the jobs market is still tight and productivity growth is weak,” Mr Bloxham said.

“Our central case is for cuts to begin in Q2 2025, but we see an increasing risk that they are delayed further or do not come at all.”

While keeping his recent call for a first rate cut in February, CBA head of Australian economics Gareth Aird said: “The risk clearly sits with a later start date for the first rate decrease.”

NAB head of market economics Tapas Strickland said the path to a February rate cut “which had already narrowed following recent data, looks even narrower following today’s presser”.

The RBA’s revised forecasts, based on a slower pace of rate cuts than was assumed in August, now have trimmed mean inflation hitting 3 per cent – the top of the 2-3 per cent target band – for the year to June 2025, down from 3.1 per cent previously. “While most of these are small changes, the forecasts do appear to have evolved in a more neutral direction than the rhetoric,” ANZ head of Australian economics Adam Boyton said.