The RBA has kept the cash rate unchanged at 2.5 per cent for over a year now.
And the standard line in monetary policy decisions of late has been signalling that the status quo will remain in place.
“On present indications, the most prudent course is likely to be a period of stability in interest rates,” says the Reserve Bank.
At the same time, the dominant view of analysts has been that the RBA will start to normalise policy at some point.
Ten out of 28 economists in this week’s Bloomberg survey picked a rate hike by the end of the second quarter of 2015, and a majority of the respondents saw it happening by the end of the third quarter.
None forecast an easing as the next move.
But in the wake of this week’s market turmoil, and of further easing by other central banks globally – in South Korea and Poland – it may be worth exploring what it would take to bring a rate cut back to the RBA table.
Keeping the powder dry
A couple of scenarios spring to mind. The first is simple: If the current “risk-off” environment were to turn into a full-blown crisis and a global recession, then there’s little doubt that the RBA would utilise its firepower.
With the cash rate at 2.5 per cent, there’s no reason why the RBA couldn’t cut the rate by 150 or 200 basis points in a hurry.
It’s one of the few developed-market central banks with the scope to deliver such a round of conventional easing.
But absent a global Armageddon, are there other circumstances under which the RBA could be cutting rates within the next six months?
Maybe, but several things would have to come together, and here are four such considerations.
Commodities
First, angst about the commodity downturn would have to rise further. This is now happening.
A big downturn in the mining sector’s capital spending has been part of the Australian narrative for some time, and the reality of that is starting to unfold now.
Moreover, the recent falls in the iron ore price – and the aggressive volume expansion by the major producers – is starting to drive longer-term price forecasts lower, with the obvious consequences for capital spending, government revenue and so forth.
Safe as houses?
There also needs to be an appreciation that housing construction will start to lose momentum soon.
Yes, building activity is still on the way up, but the leading indicators — housing finance and building approvals — are now levelling out.
Come mid-2015, the lion’s share of the upswing will be done.
And with macroprudential measures on the cards, the housing downside could be more abrupt than currently anticipated. What will take its place?
Employment
The key barometer for that question — and the third element to consider — is the state of the labour market.
The trend in the unemployment rate has been central to gauging whether the transition from a mining-driven growth to a non-mining one is happening
There have been some signs of stabilisation, but it is difficult to argue that we’re on the cusp of a major improvement.
If anything, the drop in the employment component of the latest National Australia Bank survey is a worrying development.
But it is not enough to trigger a change in the policymakers’ view
Inflation concerns
Lastly, there’s a question of whether there’s enough inflation headroom to justify an easing.
After all, the consumer price index (CPI) for the second quarter had headline inflation running at 3 per cent, despite the backdrop of record-low wage growth.
However, third-quarter CPI rose just 2.3 per cent in the 12 months to September, driving inflation toward the bottom of the RBA’s target band.
And with inflation expectations and energy prices falling, there seems to be plenty of headroom for a rate cut.
So at this stage, two out of the four factors look like getting a tick.
While an easing is by no means a base-case scenario, its probability is rising.
And given the surprise that this would represent to consensus expectations, developments in those other two factors are worth watching closely
Guy Bruten is a senior economist at AllianceBerstein, Asia Pacific.
