Up until this week, HSBC’s chief economist, Paul Bloxham, had maintained that a rate cut wouldn’t occur until at least the second quarter of this year, but last week’s lower-than-expected inflation data, combined with escalating global trade tensions, has led him to reconsider his position.
Bloxham, who had assigned a 25 per cent chance to the notion that rate cuts wouldn’t happen this year, acknowledged a shift in his outlook on Tuesday.
“We pull forward our first RBA cut from Q2 to February,” Paul Bloxham said in a market note.
Though still somewhat conservative about the timing of rate cuts, Bloxham now aligns with the views of the big four banks, all of which have recently adjusted their expectations – except for the Commonwealth Bank of Australia (CBA), which has consistently forecast a February cut despite strong headwinds.
In the note, Bloxham wrote: “Last week’s CPI print was low enough to shift the balance of risks, in our view, increasing the chance of a cut in February, rather than Q2, which had been our central case.”
However, it wasn’t just the CPI print that pushed Bloxham towards February. It was recent trade policy developments that significantly altered the economic outlook.
“As we said at the time [of the CPI print], with the local jobs market tightening, the unemployment rate still low and the economy operating at close to its capacity, we felt that domestic conditions did not yet warrant a rate cut,” Bloxham said.
“Global events have overtaken this view though, with trade policy developments over the past couple of days shifting the global backdrop markedly,” he said.
He explained that the escalation of trade tensions creates “clear downside risk” for the global economy.
“Although it is still early days to quantify the impact of these policy changes, the scale and breadth of the tariffs on types of products and countries suggests is likely to be significant,” Bloxham said.
“We see it as enough to tip the RBA’s view in favour of starting to support the economy a little earlier than we had previously thought.
“This is the first time we have changed our view on the RBA since May 2024.”
While Bloxham now expects the RBA to cut its cash rate by 25 basis points in February, he warned that inflation would likely fall only gradually, and the jobs market would remain “fairly tight”. As a result, he anticipates that the RBA will only cut rates once more in 2025.
In a market update published on Tuesday, economist Shane Oliver, who briefly shifted his forecast to May before returning firmly to February, said President Trump’s trade war has become a stronger case for an RBA rate cut as its more of a threat to Australian growth than inflation.
“US tariffs won’t add to Australian inflation unless Australia imposes tariffs on US products in retaliation or the Australian dollar plunges,” AMP’s chief economist said.
“So in terms of the impact on RBA monetary policy, our assessment is that Trump’s trade war adds to the case for a rate cut because it’s more of a threat to growth than inflation.”
Oliver also noted that a weaker Australian dollar could slow the pace of easing, suggesting the RBA might cut in February but hold steady in April to avoid further devaluation.
“This is consistent with the money market’s assessment that saw the probability of a February rate cut rise to 96 per cent after the tariffs were announced.”
Last week, NAB jumped on the rate cut bandwagon, joining its big four peers in predicting a 25 basis point cut in February.
The bank, the last to weigh in among its big four peers, made the call on Thursday, following last week’s consumer price index (CPI) data.
“While we still see value in waiting, the pivot in the RBA’s communication in December, confirmation of weaker-than-forecast CPI outcome for Q4 and a softer outlook for the housing components of inflation, alongside further encouraging progress on market services, means that we think the RBA will now make the first cut in February,” the bank’s economists said.
But the bank stressed that despite pulling the call forward, it too expects a gradual easing phase.
Commonwealth Bank was the only big four bank to stick with its forecast, having settled on a February rate cut back in October.
In its analysis of the CPI data last week, its economist Gareth Aird said: “We believe today’s data has given the green light for the RBA to commence normalising the cash rate at the February board meeting with a 25 bp rate cut.”
Aird assessed that the latest inflation print strengthened the belief that the “glide path” of returning underlying inflation to the target band has “gathered steam”.
“Our base case looks for 100 bp of easing over 2025 that would take the cash rate to 3.35 per cent,” Aird said.
“We have pencilled in one 25 bp rate cut per quarter over 2025.”
