The Reserve Bank of Australia is due to meet this week amid mixed economic data, with economists predicting sluggish growth coupled with persistent cost pressures will deter the bank from implementing rate cuts in 2024.
According to HSCB’s Paul Bloxham, the RBA is more likely to focus on the necessity of further monetary tightening rather than considering potential rate cuts.
“We expect the RBA to remain on hold in March and the board discussion to be about whether another hike is needed, rather than about any prospect of rate cuts,” the chief economist said.
“Forthcoming personal income tax cuts from 1 July and the risk of more fiscal spending in the May budget, perhaps primed by an election that is due before mid-2025, bolster the case for the RBA to remain on hold.”
Bloxham believes the past six weeks have brought further evidence that the monetary tightening that has already been delivered has slowed growth and thus weakened demand, with the Q4 2023 GDP figures in line with RBA’s forecasts at 1.5 per cent.
On the labour market, he noted although official labour force figures suggest the jobs market may have weakened a bit faster than expected around the turn of the year, changed seasonal hiring, and work patterns in the post-pandemic period make it difficult to be certain.
“The broader set of jobs market indicators suggest a continued gradual loosening of the jobs market rather than a sharp weakening,” Bloxham said.
He tipped that while the slowdown in growth and loosening in the jobs market are helping to drive inflation towards the RBA’s 2 to 3 per cent target band, this is happening gradually and inflation remains too high.
“A key challenge is that, although growth in demand has slowed, productivity has been weak and the supply side of the economy is still constrained. This is reflected in still-elevated cost pressures in the business surveys and a growth rate in unit labour costs that is well in excess of what is consistent with the RBA’s 2-3 per cent inflation target,” the economist said.
“Although surveyed capacity utilisation has fallen a little, it is still high and close to previous cyclical peaks, suggesting that aggregate demand may still be running in excess of aggregate supply”.
In the US, inflation rose to the upside, growing 3.2 per cent in February, up from 3.1 per cent in January. As such, previous expectations for an initial rate cut as early as March have been reconsidered, given the stall in progress indicated by the inflation data.
Based on the data from the US, AMP’s Shane Oliver also expects the RBA to exercise caution at its upcoming meeting on Tuesday, noting that it would likely reiterate that a further rate hike can’t be ruled out.
“The RBA is likely to leave interest rates on hold at 4.35 per cent and retain a mild tightening bias by repeating that “a further increase in interest rates cannot be ruled out”,” the chief economist said.
“Given the generally slowing but somewhat mixed readings [inflation and GPD] the RBA is likely to sit on its hands still waiting for more confidence “that inflation is moving sustainably towards the target range”.”
Unlike Bloxham, Oliver still expects the first rate cut to occur in June, but conceded there is now a high risk it could be delayed until August.
“Significant fiscal stimulus in the May budget could risk delaying the start of easing but the RBA will probably want to see whether this eventuates or not before starting to cut – which likely rules out a May cut.”
Earlier this month, GSFM’s Stephen Miller outlined the challenging “last mile” on the path to disinflation but predicted an easing process will commence around mid-year, with the ECB expected to be the first cab off the rank in June or July, followed by the Fed in late July, and the RBA in early August.
