Canada and the European Union became the first big economies to cut their interest rates last week following the most aggressive global hiking cycle seen in decades.
The US Federal Reserve is poised to lead the next wave of interest rate cuts while Australia remains on the sidelines due to ongoing concerns about stubborn inflation.
Speaking at an event last week, the deputy governor of the Reserve Bank of Australia, Andrew Hauser, said Australia is not out of sequence with other major global economies despite its drawn-out inflation fight.
“Their interest rates were higher than ours, their inflation rate is lower than ours and their unemployment rate has picked up quite a bit more substantially than ours,” said Hauser.
“I think if you took the data out of Canada and plugged it into the Australian context, you might well see a different policy stance. Canada is in a different place in terms of the economic development and they made the decisions that are right for them. In Europe, there has been a very persistent lack of growth.”
Hauser explained that the aggregate growth rate in Australia is far better than that in continental Europe and suggested that the European Central Bank’s (ECB) decision was influenced by the US.
“It’s interesting if you have a look at the European decision, they actually revised up their inflation forecast for the medium term while they cut interest rates. That’s probably a bit of a communication challenge for them,” Hauser said, divulging that not everyone on the ECB is “sure where rates are going next”.
“They’ve been keen to start the rate cutting cycle, to show that they are independent of the US, but whether that goes a lot further and where it goes from here, I’m not so sure.”
Hauser explained that central banks worldwide face the same fundamental challenge: “sticky inflation on the way down”. He added that the RBA’s actions are not significantly different from those of its global counterparts.
“This is not some radical strategy off the mainstream, off the grid. This is core central banking,” the deputy governor said.
Additionally, he highlighted aspects of the Australian economy that are worth protecting.
“The employment gains in Australia have been impressive … On growth as well, the periods of negative growth have been 1, 2, 3, in the UK, I think 12 in the past 20 years quarters of negative growth. Those are things worth celebrating. They are things worth protecting.”
Speaking before the Senate economics committee last Wednesday, RBA governor Michele Bullock said the bank would remain “data driven”, meaning it intends to maintain its neutral stance in anticipation of the next instalment of quarterly inflation data.
But she cautioned that a rebound in inflation would prompt the bank to raise interest rates again.
“If it turns out that inflation starts to go up again or it’s much stickier than we think, we’re not getting it down, then we won’t hesitate to move and raise interest rates again,” Bullock said.
Conversely, weaker-than-anticipated data would compel the RBA to cut rates.
“In contrast, if it turns out that the economy is much weaker than expected then that puts more downward pressure on inflation, then we’ll be looking to ease.”
The RBA will next announce its cash rate decision on 18 June.
Rate cut expectations delayed
ANZ confirmed on Tuesday it has pushed back the likely timing of the RBA’s first interest rate cut to February 2025. The bank had earlier said it expects a cut as soon as November this year.
“We expect a follow-up easing shortly thereafter (most likely in April, although May is possible) and are retaining three cuts in our forecasts but see the final cut being delayed until the final quarter of 2025,” said Adam Boyton, head of Australian economics at ANZ.
AMP’s Shane Oliver still maintains that a rate cut could occur this year.
In his latest weekly update, the chief economist said: “The most likely outcome remains that the RBA will remain on hold for the next several months”.
“But we continue to see the first rate cut coming by year end as continuing weaker-than-expected economic conditions provide the confidence it needs regarding the inflation outlook.”
