Hot Take: A hawkish cut
The RBA has cautiously cut rates, but was it a mistake? Implications for the federal election and a warning from America.
Well, it finally happened. For the first time since November 2020, the Reserve Bank of Australia (RBA) cut its overnight cash rate, from 4.35% to 4.10%.
Here's the key part of Governor Bullock's explanation:
"The Board's assessment is that monetary policy has been restrictive and will remain so after this reduction in the cash rate. Some of the upside risks to inflation appear to have eased and there are signs that disinflation might be occurring a little more quickly than earlier expected. There are nevertheless risks on both sides.
The forecasts published today suggest that, if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range. In removing a little of the policy restrictiveness in its decision today, the Board acknowledges that progress has been made but is cautious about the outlook."
While a long time coming, this decision was largely expected before the RBA even met: the last consumer price index update was softer than most anticipated, and the implied odds based on financial market futures pricing (a proxy for expectations) in the lead up suggested there was a 90% chance of a 25 basis point cut.
This shouldn't be the first of many
Futures markets price what the RBA is likely to do, not what it should do. There has been a huge amount of political and media pressure placed on the RBA for several months now, and I suspect that the criticism it would have faced by not cutting has forced its hand here – hence the "hawkish cut".
So, the Governor was right to be "cautious on [the] prospects for further policy easing", as it's not at all clear that even this cut was needed. That's because from a purely economic point of view, the Australian economy – despite its lacklustre real growth – does not appear to have a nominal demand problem.
For example, credit growth to all borrowers has been steadily increasing since the end of 2023, which was around when the RBA did its last rate hike (8 November 2023).
Rather than in desperate need of lower rates to boost activity, the Australian economy looks as though it's receiving ample liquidity. If anything, the rebound in the demand for investment (borrowing) may have been pushing real interest rates up.
