Janus Henderson is optimistic about further Reserve Bank rate cuts, with a base case predicting a 100 basis point easing cycle, following last month’s first rate cut in over four years.
“We believe the RBA will lower the cash rate a number of times this year, taking the rate to a low of 3.35 per cent,” said Emma Lawson, Janus Henderson’s fixed interest strategist for macroeconomics.
“The reason we are forecasting slightly more than the market is pricing is that we place greater emphasis on the moderating inflation rate than the stable unemployment rate. The RBA has dual goals: price stability and full employment.”
The RBA is on track to meet its price stability goals in the coming year, as demand-driven inflation moderates and supply prices, such as housing, continue to decrease, the strategist said.
“This is all occurring at a time where employment growth is strong,” Lawson said.
“This suggests that an unemployment rate of 4.1 per cent is not representative of full employment, it should be lower. The latest wage growth data backs this up, with wages growth moderating to 3.2 per cent year-on-year. If the labour market was tight, then wages growth would be accelerating.”
All in all, Lawson argued that this indicates “no need” to keep monetary policy above neutral, as it acts as a headwind to economic activity.
Earlier this week, the RBA signalled a cautious approach to further rate decisions, noting it does not commit to additional reductions in the cash rate target at future meetings.
“Future decisions would be guided by the incoming data and evolving assessment of risks. Returning inflation to target remains the board’s highest priority and it will do what is necessary to achieve that outcome,” the central bank said.
The consensus among economists and fund managers appears to be two more cuts this year, which contrasts with Janus Henderson’s more generous reading.
BlackRock’s Craig Vardy said the firm’s expectations align with the market, but warned the risk is that only one rate cut may be delivered.
“We do expect the RBA to cut the cash rate again in 2025 and think the market’s pricing of two 25 bps cuts seems reasonable,” Vardy said. “The risk is that only one of those cuts is delivered.”
While Janus Henderson is certainly more upbeat, Lawson did entertain the possibility the RBA’s path may only have two cuts and a long pause, adding, “We assign a 25 per cent probability to this”.
