- Financial markets now see a rate cut from the RBA this year as a done deal.
- The Commonwealth Bank’s Fixed Income Strategy team outlines why every RBA meeting is now live for a potential cut, not just those that follow Australia’s inflation report.
- The Commonwealth still sees the next move in Australia’s cash rate as being up, not down.
Markets are now on alert for a RBA rate cut this year, or maybe two. An increasing number of economists also believe the cash rate will be cut twice this year.
The favoured months for a potential movement are May, August and November, coming shortly after the release of Australia’s quarterly consumer inflation (CPI) report and just before the RBA’s quarterly statement on monetary policy (SoMP), in which the bank releases its updated economic forecasts.
Therefore, the fact that markets are pricing the greatest probability of a movement in these months is not all that surprising.
However, while the RBA has said that a lack of progress in returning CPI to its target band is one potential trigger that could warrant a rate cut, it’s also said that a sustained lift in Australia’s unemployment rate is another outcome that could lead to easier policy settings.
To the Commonwealth Bank’s Fixed Income Strategy team, the nomination of the unemployment rate as an alternate trigger means that any RBA meeting from now on is live for a potential cut.
“The timing of the SoMPs in the same month as the post CPI meeting does mean the RBA is more likely to move in that month. But the argument for a rate cut has nothing to do with CPI,” it says.
“The RBA itself has identified that the driver of the next rate cut would be indications that the fall in house prices is spreading to the broader economy, most likely via the labour market.
“Other than the SoMP, we see no reason why that argument hinges on CPI. The CPI is hardly a reason not to cut rates at present.”
That view makes sense, especially as Australia’s jobs report is released monthly, along with a variety of leading labour market indicators.
Reinforcing the point that a post-CPI meeting may not be when the RBA decides to move, when rates have been reduced in the past, more often than not, it’s not occurred in these months.
While the overall tendency of the RBA to move rates in SoMP months is clear, the tendency is decidedly asymmetric,” the CBA says.
“Since 1996, for movements higher in yields, 15 of the 24 moves have come in SoMP months. For movements lower in yields, only 13 of the 30 moves are in SoMP months. Overall, it’s 28 moves in SoMP months and 26 moves in non-SoMP months.
“Interestingly, the most common months to move rates are May and November which are both SoMP months. But the most common month to cut rates is actually December.”
Of course, all of this analysis is hypothetical, assuming the RBA will cut rates.
For what it’s worth, the CBA still sees the next move in the cash rate as being higher, albeit not until the second half of next year at the earliest.
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