RBA rate cut seen unlikely in 2024 on inflation caution

Westpac economists are reviewing their forecast for the first Reserve Bank interest rate cut following a hawkish tone to the latest Board meeting.

The RBA left the cash rate on hold at 4.35 per cent this week, as widely expected, while delivering a cautious message on the outlook for inflation. 

“What is a little puzzling is their view about how long they think they need to keep interest rates steady from here,” Westpac Chief Economist Luci Ellis told Sean Aylmer on the Fear & Greed podcast. 

Ellis said it was always likely that the RBA would be one of the last central banks to start easing policy given that rates here didn’t go up as far as in other countries, yet the bank seemed to be taking the view that it could not begin to cut the cash rate until inflation is very close to the 2-3 per cent target band.

“We know that policy operates with a lag, we know that you actually have to start reducing the restrictiveness of policy before you get back to target, and that consideration didn’t really feature in any of their communication yesterday.”

Ellis acknowledged that her expectation of a November rate cut is now unlikely to be achieved and is reviewing her forecast to assess the basis for the RBA’s economic outlook. 

The RBA revised up its assessment of aggregate demand in the economy back in May, which goes some way to explaining its caution, Ellis said. That was based on stronger government spending than previously expected and population growth staying higher for longer. 

“If you’re adding more people, you’re adding more demand but you’re also adding more supply - so the other piece of the puzzle is that they’ve also downgraded their forecast for productivity growth,” Ellis said.

The RBA seemed to be taking a more pessimistic view on how quickly productivity growth will recover following the pandemic, she added. 

On a brighter note for mortgage holders, Ellis said the June quarter inflation numbers had given her greater certainty that there would be no further rate hikes.

“So as long as inflation remains on track, they’ll have to remain vigilant and they’ll have to keep the rhetoric very robust, but ultimately they’re going to be in a position to be able to say: we’re close enough that we can start removing the restrictiveness of policy.

“They’re not in a hurry to do that, and they’re clearly in less of a hurry than we would have expected, but that’s the profile that they’re looking at.”

You can read Luci’s note on the latest RBA meeting on WestpacIQ.