LUCI’S CALL: Rate cut is getting closer
A dovish shift in the RBA’s language following its December Board meeting suggests that a rate cut as soon as February cannot be ruled out.
The Reserve Bank of Australia left the cash rate on hold at 4.35 per cent at its final meeting of the year, as expected, but said it’s gaining confidence that inflation is declining in line with its expectations.
Significantly, the RBA’s statement dropped the line that it is “not ruling anything in or out” in terms of policy, which had been a feature of every statement since March, and removed a reference to remaining “vigilant.” In other words, we are getting closer to the point that the RBA will be comfortable cutting rates.
In her post meeting press conference, Governor Michele Bullock acknowledged that under certain circumstances there was a world in which the RBA starts easing in February.
That’s not our base case scenario - we still think it’s more likely they’ll wait until May - but we’ve always said that an earlier move couldn’t be ruled out if the economic data comes in on the soft side.
The RBA is looking for good outcomes on inflation and will also be keeping a close eye on developments in the labour market and consumer spending.
As we currently stand, the RBA continues to see aggregate demand outstripping supply and while that remains the case it will be cautious about easing policy.
The central bank needs to see that inflation, and more specifically the underlying trimmed mean measure, is on a sustainable path back toward the mid-point of its 2-3 per cent target band.
It also assesses that the labour market is still tight, even though wages growth is falling quite quickly and under-shooting their expectations.
Overall, the shift in the RBA’s language in December is enough to add a bit more credence to the idea of a rate cut in February, but we think May is still the more likely timing. The data from here will be key in helping to inform the outlook for the cash rate.
To read Luci’s note in full, visit WestpacIQ.