Summary
RBA Joins Global Rate-Cutting Cycle!
After 15 months of keeping rates on hold, the Reserve Bank has joined the global rate cutting cycle reducing the cash rate by 0.25 percent to 4.10 percent. RBA took comfort from recent progress in the battle against inflation and while noting geopolitical uncertainty emanating from the USA, it chose to make current policy settings less restrictive.
Inflation has moderated to 3.2 percent in underlying terms, within reach of the 2 percent to 3 percent target band. On a six-month annualised basis, the RBA’s preferred measure of underlying inflation is around 2.6 percent. Given this is ahead of RBA forecasts, this provided sufficient justification to change policy in the context of a strong jobs market.
RBA Statement
The RBA Monetary Policy Statement noted that both headline and underlying inflation have come down, partly because interest rates are slowing some areas of the economy. They cited that demand also seems to have eased in the housing market, which has seen a material slowing in housing and rental price increases.
Within the statement, it was recognised that the strength of the labour market was underpinned by strong employment growth in the non-market (govt) sector with the RBA recognising the risk to maintaining this strength if expected private demand does not materialise.
Globally, it was recognised that while new trade policies could lead to slower growth and potentially higher inflation, an escalation of current global trade tensions could also lead to an economic slowdown in Australia.
Our Take
The RBA chose to look through recent spikes in inflation expectations, taking the view that underlying inflation is on track to return to target. The RBA downplayed the enduring strength in the employment market and we expect underwhelming Australian labour productivity outcomes may have influenced this decision.
Consecutive rate cut changes are usually expected at the start of a rates cycle. The board clearly wants
to signal that this time might be different, implying that while the inflation result is encouraging, it is prudent to not declare victory on this front yet. A hawkish cut, in central bank vernacular.
The effect of a rate cut in an economy with continued strength in jobs growth underpinned by super-sized government spending and population growth driven demand will be interesting. It’s hard to imagine the effect is on balance disinflationary if fiscal policy remains loose.
The other question for the week is given the federal Labor government was eagerly awaiting a cut for validation of their efforts at taming the cost of living – will this rate cut fire the federal election campaign starting gun?
Martin Wilkinson
Head of Investments
martin.e.wilkinson@allianz.com.au
Adam Downy
Investment Analyst
adam.j.downy@allianz.com.au
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