Economists have been seesawing on whether February could mark the start of a rate-cutting cycle, however, resilient labour market data released on Thursday has thrown another spanner in the works for those trying to chart rate movements.
Namely, according to the print, employment rose by an impressive 56,300 in December, well above expectations of a 15,000 lift, while the unemployment rate increased to 4 per cent.
VanEck portfolio manager Cameron McCormack is of the opinion that the latest print reinforces his long-running position that the Reserve Bank is unlikely to make the first rate cut until later in the year.
“While unemployment has come in higher for December, it hasn’t reached a level where there is an urgency for the RBA to cut rates. The tight labour market will continue to exert upward pressure on services inflation, which is more pronounced relative to the US,” McCormack said.
“In recent weeks, we’ve seen markets firming up on a Feb rate cut, currently at a 70 per cent probability. However, we feel this is somewhat optimistic and suspect sentiment will shift further out if Q4 CPI release later this month comes in hotter than anticipated off the back of a weaker AUD pushing up petrol prices and other key imports.”
Similarly, Betashares’ David Bassanese believes that the RBA will refrain from cutting rates in February, unless the annual growth in the quarterly trimmed mean inflation measure falls to at least 3.25 per cent.
“My expectation is that it will fall to only 3.4 per cent – which would be good, but not good enough,” Bassanese said.
Conversely, AMP’s deputy chief economist, Diana Mousina, believes a February cut is still highly probable, but explained in her market commentary that a lot hinges on the inflation figures due to be released on 29 January.
“Given that today’s employment data was solid across the board (which doesn’t argue the case that a rate cut is needed to support the economy), it is still unclear if a rate cut will occur in February,” Mousina said.
“The December quarter inflation figures will be the final piece in the interest rate debate puzzle.”
AMP’s base case had been for a rate cut in May, but it is now putting the odds of a February cut at 50 per cent.
“Either way, we expect three rate cuts this year in Australia, with the cash rate reaching 3.6 per cent,” Mousina said.
CBA’s Gareth Aird described Thursday’s jobs print as an “unusual configuration of numbers”.
“The outcomes of strong employment growth and a lift in the participation rate were at odds with our pick and the consensus of economists,” Aird said, adding that the labour market data has been a head scratcher for economists and the RBA over the past year.
However, despite the fact the strength in hiring continues to defy signals coming from gross domestic product growth and other activity indicators, Aird said the CBA sticks with its call for a 25 basis point cut in February.
“Australia should be able to run an unemployment rate of approximately 4.0 per cent and see inflation within the target band sustainably,” the head of CBA’s Australian economics said.
Earlier this week, concerns increased about the impact the falling Australian dollar could have on the RBA.
However, speaking to InvestorDaily, AMP’s Shane Oliver dispelled concerns, noting that the central bank looks at the dollar trade weighted index (TWI) which has experienced a “less severe” drop.
While the Australian dollar relative to its US counterpart has come down from US$0.69 at the start of October to US$0.62, the TWI has fallen just 5 per cent since the end of 2023.
“I think the risks on this front are low as while the Australian dollar is down about 10 per cent versus the US dollar from where it was at the start of last year, it’s only down about 5 per cent against the trade weighted average because other currencies have also fallen against the US dollar and both the Australian dollar/US dollar and trade weighted index are still in the same range they have been in for the last four years now, albeit at the bottom of that range,” Oliver told InvestorDaily.
“What’s more, apart from higher petrol prices and maybe some international airfares, it will be hard for importers to pass on higher import prices to consumers given weak discretionary demand. So, while the fall will be of concern to the RBA, I don’t think it will stop them easing and ultimately, they will be driven by domestic inflation,” the chief economist said.
Oliver believes the RBA is likely to begin cutting rates in February, especially if the December quarter trimmed mean inflation outcome is around 0.6 per cent quarter-on-quarter or less.
Last week, ANZ became the first major bank to change its rate forecast.
Namely, the bank, which previously moved back its rate cut expectations to May, said on Friday, “the weaker-than-expected monthly CPI indicator for November” prompted it to downgrade its Q4 trimmed mean inflation forecast and to adjust its rate expectations.
ANZ now expects the RBA to cut the cash rate by 25 bp at its February meeting, before pausing until another equal cut in August, taking the cash rate to 3.85 per cent.
CBA was the only big four bank still entertaining a February rate cut even prior to the release of the latest monthly CPI print.
NAB and Westpac are for now maintaining their May rate cut expectations.
