- Financial markets think a 25 basis point rate cut from the RBA this year is a certainty, with a growing risk of a second.
- A growing number of economists are also forecasting 50 basis points of cuts this year.
- You mightn’t know it based on recent data and headlines, but not everyone thinks the RBA will cut rates.
- ANZ and HSBC are putting faith in firm job market conditions and fiscal stimulus will avoid the need for rate cuts.
You mightn’t know it from recent headlines and Australian economic data, but there are still a few people who think the Reserve Bank of Australia (RBA) won’t cut interest rates this year.
Amidst a plethora of forecasters who now expect the RBA will cut rates this year, David Plank, Head of Australian Economics at ANZ Bank, is holding firm, maintaining the view that the next move in Australia’s cash rate will be higher, albeit not until 2021 at the earliest.
The reason underpinning this view is the same as that held by the RBA: Australian employment growth will remain firm.
“Some leading indicators are painting quite a bearish picture on unemployment. But the ANZ Labour Market Indicator (LMI) points to stability over the next six months or so, in line with the RBA’s latest forecast,” Plank says.
“The LMI suggests the point of maximum downward pressure on the unemployment rate has passed, but it does not yet point to a period of rising unemployment.
“For this reason we expect the RBA to stay on hold in 2019 and 2020.”
For clarity, the LMI combines a variety of leading labour market indicators to provide a broad view on what labour market conditions are likely to do in the period ahead.
While Australian economic growth slowed sharply in the second half of last year, something that prompted an array of forecasters call for multiple rate cuts from the RBA in the months ahead, Plank points out that not only does the RBA not target GDP growth, but growth slowdowns in the past have not automatically triggered rate cuts in the past.
“The RBA’s objectives are unemployment and inflation, not GDP,” he says.
“There have been times the RBA has eased when GDP growth has been weak. But it has also cut rates when GDP growth has been strong and accelerating. And it has raised rates when GDP growth has looked relatively soft.
“The consistent theme in the RBA’s response function has been the direction of the unemployment rate.”
The RBA confirmed that view earlier this year, acknowledging that a sustained increase in the unemployment rate or lack of progress in returning inflation to its 2-3% target were two triggers that could warrant a reduction in the cash rate.
While underlying inflation remains weak, and well below even the bottom of the bank’s target, unemployment currently sits at the lowest level since 2011. That means that unless labour market conditions start to weaken, the RBA is unlikely to act on weak inflationary pressures.
Philip Lowe actually made that point in his first speech as RBA governor back in late 2016.
Along with an expectation that the jobs market will continue to tick along nicely, Plank expects that additional fiscal stimulus will soon be deployed by the government, something he says should help to address mounting concerns about the outlook for the economy.
“With interest rates at record lows fiscal policy is a better option to stimulate the economy than yet more monetary easing,” he says.
“We expect the April Budget to be stimulatory, with both larger personal income tax cuts and more spending likely to be announced.
“A budget along these lines would go a long way to lessening concerns about growth in 2019 and 2020.”
So rather than additional monetary policy stimulus through rate cuts from the RBA, Plank expects fiscal policy to do the heavy lifting for the economy on this occasion given the improvement in Australia’s budgetary position.
Plank is not alone in expecting that fiscal, rather than monetary policy easing, will likely be enough to help support the economy moving forward.
Paul Bloxham, HSBC’s Chief Economist for Australia and New Zealand at HSBC, is another who thinks the combination of firm job market conditions and tax relief will be enough to prevent further rate cuts from the RBA.
“Tax cuts could be a better solution for this challenge than cutting already-low interest rates even further,” Bloxham says.
“The Federal budget is due to be handed down on 2 April and the monthly numbers suggest that the budget is likely to be back in surplus for the first time in a decade.
“We expect the budget to contain a range of spending initiatives, which are likely to include additional personal income tax cuts, increased social payments and spending on infrastructure.”
Unlike others who believe the RBA will cut rates because of the slowdown in the economy, Bloxham, like Plank, says its the unemployment rate that the bank will be watching closely.
“Our view is that while the positive momentum in the labour market continues, the RBA will be able to credibly argue that wages growth should continue to trend higher, supporting consumer spending and allowing it to continue to forecast that inflation will gradually head back to target,” he says.
While that view differs from other forecasters such as Westpac, the NAB, UBS and J.P. Morgan, who believe the RBA will ease policy further, both Bloxham and Plank say that given the current backdrop, a deterioration in the jobs market would likely see both fiscal and monetary policy support delivered to the economy.
Australia’s February jobs report will be released on March 21. The RBA’s April monetary policy meeting will be held on April 2. That just happens to be the same day the budget will be handed down.
NOW READ: The reason the RBA isn’t prepared to cut rates lies within a speech that Philip Lowe gave 2 years ago
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