Quick Bite: When will the RBA cut rates?
Author: Paul Zwi
The Reserve Bank of Australia’s (RBA) board next meets on Monday 17 February and Tuesday 18 February. Typically, the decision to cut, increase, or keep the official cash rate unchanged is announced shortly after the meeting concludes at 2:30 pm AEDT (will be on 18 February).
Will rates be cut at the February meeting?
The likelihood is that the RBA will cut rates from 4.35% by 25 basis points (bps) to 4.1%. This is the expectation of the money market futures, most economists, and the big four banks.
If the board does cut in February, it will be the first reduction in the official cash rate since November 2020 (during the COVID-19 pandemic when rates hit the historical low of 0.1%). Rates began increasing in May 2022, rising 13 times over the next 15 months, and have sat at 4.35% for more than a year.
What factors does the RBA consider?
Let’s do a quick primer on the RBA’s objectives and the major factors it considers in its monetary policy decisions. The RBA seeks to “maintain price stability, full employment, and sustainable economic growth”. The following are probably the critical factors when assessing potential RBA policy shifts:
- Inflation and Price Stability, i.e. keep prices within the 2-3% target band over the medium term. The last inflation report (for the December quarter) was better than expected, with the RBA’s preferred measurements falling closer to its targeted range.
Inflation across services is easing
Source: Goldman Sachs
- Employment and wage growth. The RBA monitors the unemployment rate, underemployment, and workforce participation, plus wage growth (weak wage growth indicates slack in the labour market, reducing inflationary pressures).
The signals from the labour market are mixed
Source: Goldman Sachs
Employment growth is being driven by strong population growth
Source: Goldman Sachs
- Economic growth and the output gap. The pace of economic expansion informs monetary policy adjustments. The Output Gap is the difference between actual and potential GDP and helps assess inflationary pressures. Another factor falling in this category is Business Investment & Productivity: growth in private sector investment and productivity impacts long-term economic performance. Economic growth measures over the past year have been well below long-term trends, with expectations of more of the same.
- Global economic conditions are obviously a very broad subject but with a focus on the US Federal Reserve (Fed) and other Central Banks. Monetary policy actions from the Fed, European Central Bank (ECB), Bank of England (BoE), and the Peoples Bank of China (PBoC) influence capital flows and exchange rates. Most recently, the BoE cut rates on 6 Feb from 4.75% to 4.5%. The RBA keeps a close eye on China’s economic performance, as China is Australia’s largest trading partner, and its growth trajectory affects Australian exports. Finally, there are Geopolitical Risks, which could include the topical issue of tariffs and trade wars, supply chain disruptions, and conflicts that impact commodity prices and investor sentiment.
- Financial market conditions and credit growth. More specifically, bond yields and interest rate expectations: market pricing of future rate hikes/cuts influences financial conditions. So do housing market trends including mortgage rates, lending standards, and property prices which affect household wealth and consumption. The RBA will also consider Private Sector Credit Growth which includes lending to households and businesses and signals underlying economic momentum.
- Exchange rate movements. A strong Australian dollar (AUD) dampens export competitiveness, while a weak AUD fuels imported inflation. At present, the very weak AUD is increasing the risk of importing inflationary pressures. The RBA will also look at the Trade Balance and Terms of Trade (the value of commodity exports relative to imports).
Source: Reserve Bank of Australia
- Fiscal policy and government spending
- The Federal budget position: Deficits or surpluses affect overall demand and inflation.
- Infrastructure and stimulus spending: Government investment can counterbalance monetary policy settings.
Government spending at both the Federal and State level has been unusually high.
- Consumer and business confidence. Consumer spending trends are closely followed specifically retail sales and sentiment surveys that provide insights into household demand. Business conditions and investment intentions – business confidence surveys indicate the corporate outlook and capital expenditure plans. Household surveys indicate spending intentions and savings plans. Surveys have shown ongoing weakness.
Sharemarkets enjoy lower rates and reduced borrowing costs. Typically, the most interest rate-sensitive sectors include financials, real estate, and infrastructure.
