Economists expect the Reserve Bank of Australia (RBA) to keep lowering Australia’s official cash interest rate despite hawkish RBA comments aimed at hosing down these expectations.
The RBA cut the cash rate by 25 basis points (bp) to 4.10% on Tuesday, as was widely expected, but in a news conference RBA Governor Michele Bullock did her best to reset hopes that there was more to come.
“Today’s decision does not imply that further rate cuts along the lines suggested by the market are coming,” Bullock told journalists.
She said the market had been “too confident” in pricing more easing of monetary policy and that the labour market remained “tight”.
But Goldman Sachs said it cautioned against putting too much weight on the RBA’s guidance and concerns about the strength of the labour market, referencing the central bank’s comment that jobs data had been unexpectedly strong.
The investment bank said this had not stopped the RBA from “pivoting dovish” in recent months and ultimately cutting rates on Tuesday.
“Our recent research highlighted some reasons why the labour market is not proving to be inflationary, and we expect continued sanguine reads on labour costs and inflation will draw the RBA into further rate cuts over the coming months,” Goldman Sachs said in an economics research note.
“Our base case is that the RBA cuts the policy rate again in April, May and November to a 3.25% terminal rate, although we acknowledge the balance of risks is skewed to a more elongated easing cycle.”
RBA Capital Markets said the underlying message of the central bank’s prudent and cautious approach was that economic data needed to support further cuts, the cycle was likely to be modest and without external risks, domestic factors argued for monetary policy to be restrictive.
“There may well be some jawboning here until the RBA sees further disinflation and is much more confident inflation will return sustainably to target,” RBC said in a research note.
“Accordingly, we remain comfortable with our base case for 2 further 25 bp cuts in May and (August).”
Chief CommSec Economist Ryan Felsman said CommSec’s base case was that the RBA would cut the official rate by 25 basis points in each of May, August and November.
He said this would follow quarterly inflation data in April, July and October and would put the official rate at 3.35% by year end.
But he said there was a risk the central bank may follow the rate cut on Tuesday with one in April if the labour market continued to deteriorate.
The market was pricing the chances of a cut in April at 25% and May at 50%.
