The Reserve Bank of Australia (RBA) is largely expected to keep the cash rate on hold in August; however, its next move grows murky in the face of new global economic data.
The RBA, which will announce its latest rate decision on Tuesday, 6 August, is expected to hold rates at 4.35 per cent.
This follows better-than-feared inflation figures published by the Australian Bureau of Statistics last week, with the consumer price index (CPI) rising 1 per cent in the June quarter and 3.8 per cent annually.
Notably, the last week also saw weaker-than-expected US jobs data, igniting fears of a potential US recession and, subsequently, a broad sell-off in markets.
The S&P/ASX 200 tumbled over 3.5 per cent on Monday, 5 August, and has fallen 4.1 per cent in the last five years.
Global share markets have also noted significant declines, with the Nasdaq down 3.8 per cent, and the Dow Jones down 2.2 per cent over this period.
“A lot can change seemingly overnight in the world of central banks and what we’ve seen transpire over the past week certainly speaks to this,” said Scott Solomon, co-portfolio manager of the T. Rowe Price Dynamic Global Bond Strategy.
“Markets saw a nearly 50 per cent chance of a hike by the RBA before the end of the year get completely turned on its head with markets now pricing nearly a 100 per cent chance of a cut before the year is out.
“There was a boost by the cool CPI print earlier, but with global economic data disappointing across the board, it seems like nothing can stop the cut train.”
He posited inflation could fall into the desired band about a quarter before current RBA estimates, with a rate cut potentially on the table before the year is over.
“While we don’t expect governor Michele Bullock to commit to cuts, it’s unlikely she does much to push back against them. The rest of her global central bank counterparts are dovish – peer pressure is tough to avoid,” Solomon said.
Richard Yetsenga, group chief economist, ANZ, said the RBA’s tone will be watched closely for any signs of change from hawkish views.
“The RBA, I think they’ll still sound actually a bit hawkish, which may, I suspect, grate a little bit against where the market is currently pricing, but I think fits the data that currently exists in Australia and the trend that’s there,” he said.
“It’s over the next few months, I suspect, that you’ll see a bigger shift in the way the RBA is characterising the economy and the inflation cycle to become more dovish, and start to lay the ground for the RBA also, eventually, joining the global easing cycle. But at the moment, our forecast is for that not to start in Australia until February next year.”
Yetsenga added that financial markets, which are pricing in rate cuts by year-end, are likely getting ahead of themselves, pointing out “it was less than 10 trading sessions ago the market was pricing the RBA to hike”.
“I think it’s too early for the RBA to pivot from at least talking about some prospect of a hike, to then turn around and actively ease,” he said.
GSFM investment strategist Stephen Miller also believes the current market climate is unlikely to cause the RBA to veer off course.
“Australian inflation – which was better than feared, and I think that’s the operative word – is still above the RBA forecast, and the unemployment rate is around about the RBA forecast,” he told InvestorDaily.
With this, the maximum reaction that should be expected, in light of recent events, could be a more neutral tone from the bank, he said.
“I certainly don’t think the RBA will respond in any way to what we’re seeing, the maximum impact we can expect is that they might express overtly a neutral bias, whereas they’ve been reluctant to do that in the past,” Miller said.
“They hint at it, but sort of say, ‘We discussed an increase, but not a decline’, whereas it might be more even this time around. But I cannot see them cutting rates and I think it would be injudicious to do so.”
Instead, Miller forecasts a rate cut is most likely to emerge in early 2025, although he admitted it is not “implausible” to see one cut by the year end.
“If I had to pick a most-likely time, it’s February 2025. The reason I say that is, again, the inflation numbers were not as bad as feared, but it’s a mistake to characterise them as good or benign in any way,” he said.
“The RBA forecast that was made in Feb was exceeded in March, the forecast that was made in May was exceeded in June, and that was true for these numbers too, when we look at the trimmed mean. Inflation is still very sticky.”
The trifecta of a lower policy rate and unemployment rate than its developed country peers, alongside a higher inflation rate, means the RBA “will probably be one of the last to commence cutting rates”, Miller added.
Did central banks wait too long?
Addressing concerns that central bank policy may have proved too restrictive in the last few years, resulting in an economic slowdown, the investment strategist pointed out that recession fears have simmered in markets for around two years “and it hasn’t happened”.
“Central banks did hold rates for long, but I will say this too – markets have got central banks wrong for two to three years now, and central banks have been right,” Miller told InvestorDaily.
“I hear what people are saying, that central banks are behind the curve and so on, but I just remind them that that’s been a mantra for markets for the last two to three years, and certainly for the bulk of that, it’s been wrong. I’m not saying it’s not wrong now, but markets have exhibited a proclivity to over-anticipate a recession.”
He pointed out markets have enjoyed a “phenomenal” rally in the first half of the year, particularly in risk markets, and the latest US economic indicators proved startling for this momentum.
“I didn’t think the US job numbers were great, but I didn’t think they were a disaster,” he said.
“[They’re] probably not inconsistent with the range of expectations the Fed was thinking about, the unemployment rate was a little higher but that was largely because the participation rate is a little higher, so I don’t think we should get too [worked] up about the unemployment numbers.”
Looking at recent market swings, Miller continued: “Certainly, the market moves have been quite volatile, but that’s largely because markets were priced for pretty benign outcomes.
“So, if there’s bits and pieces that lead to some questioning of that, whether that’s a slightly weaker employment report, tensions in the Middle East, I think they can sometimes have outsized impacts.”
