Quick Bite: RBA commences rate cutting cycle
Author: Paul Zwi
The Reserve Bank of Australia (RBA) cut its cash rate by 25bps to 4.1%, announced at 2:30pm on Tuesday 18 February, in line with market consensus. It was the first rate reduction since November 2020, following inflation data continuing to ease. This comes after the RBA kept interest rates on hold at 4.35% since November 2023 — the highest level in 13 years.
The RBA said in its accompanying statement that it would retain a restrictive policy due to the strength of the jobs market and an uncertain global economic outlook.
“While today’s policy decision recognises the welcome progress on inflation, the board remains cautious on prospects for further policy easing,” the RBA said, noting that other central banks, including the US Federal Reserve, have slowed their pace of rate cuts in recent months.”
The RBA has been under pressure to begin easing its monetary policy, with some economists warning that the strain of higher borrowing costs on mortgage holders could push the country into recession.
Source: FT
While financial markets thought this first cut in the cycle was a foregone conclusion, RBA Governor Michelle Bullock has cautioned that just because the central bank has moved today, it doesn’t guarantee future rate relief:
“Today’s decision does not imply that further rate cuts along the lines suggested by the market are coming. The board needs more evidence that inflation is continuing to decline before making decisions about the future path of interest rates.”
Asked whether the RBA is “one and done” when it comes to rate cuts, she said it was hard to know for sure. “The market is expecting quite a few more interest rate cuts to the middle of next year, about three more on top of this. Whether or not that eventuates will tend very much on the data. Our feeling at the moment is that’s far too confident.”
“I can’t say one and done. We have done one, we have removed a bit of restrictiveness, we’re still restrictive, and we’re waiting for more evidence we’re getting inflation sustainably back in the band before we’re willing to move again.”
How will markets respond?
Source: UBS
Generally, sharemarkets welcome a rate cut, particularly when it is in response to a decline in inflationary pressures rather than due to an urgent need to stimulate or support the economy in a time of crisis. In the chart above, the sharemarket responded poorly to the first rate cut in 2008 because this was the beginning of the Global Financial Crisis. And in 2001, there was a fairly flat response to the rate cut as the market was dealing with the unwinding of the dot.com market bubble.
In 1996 and 2011, the market’s responses to the first rate cut in the cycle was positive, which is what one would expect: lower rates mean lower borrowing costs for companies, more disposable income for households and less restrictive monetary policy.
On this occasion, we would expect the market to welcome the rate cut news, but as was well anticipated, the positive response may already be baked into share prices.
At the time of writing this QB, the ASX 200 index is 78 points lower, the AUD is relatively unchanged at US$0.635 and the Government 10 year bond rate is about 5bp higher at 4.55%.
