5 reasons why the RBA will cut rates next

AMP’s chief economist Shane Oliver has shared five reasons why he believes the Reserve Bank of Australia will opt to cut rates next.

At the August meeting, the monetary policy committee decided to hold rates for the sixth consecutive time at 4.35 per cent. The next meeting will be held on 23–24 September. 

Governor Michele Bullock said the decision to once again hold rates was based on inflation data which it saw returning to target slower than expected.

“The economic outlook is uncertain and recent data have demonstrated that the process of returning inflation to target has been slow and bumpy.

“More broadly, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand, and while conditions in the labour market remain tight.”

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She warned that no rate cut was on the short-term agenda for the bank. 

Globally, the Bank of Canada and Bank of England have both begun to cut their interest rates, although both rates still sit higher than in Australia at 4.5 per cent and 5 per cent respectively, compared to 4.35 per cent domestically.

Shane Oliver, chief economist at AMP Capital, said: “We see rates as having peaked with the first cut coming in February next year. However, there is a high risk the RBA will have to start cutting rate cuts before year end if US recession fears continue to rise, unemployment here starts to follow the US up and share market falls continue.”

He listed five reasons why the next rate decision would likely be a cut:

• Monetary policy remains restrictive.
• The full impact of past rate hikes is still feeding through.
• Recession risks are high as indicated by the ongoing slump in real household spending per capita and slowing population growth, which will add to the risk.
• Forward-looking jobs indicators warn of a significant further rise in unemployment ahead.
• Wages’ growth has peaked which will slow underlying services inflation.

Industry reaction

Meanwhile, industry commentators reacted to the RBA’s decision and possible future decisions for the committee. 

Krishna Bhimavarapu, APAC economist at State Street Global Advisors, said: “The RBA seems to be uninterested in cutting rates without any clear and substantial progress, as it assumed no cuts in their updated forecasts. We think the outcome is well-balanced but, nonetheless, we maintain our forecast of the first rate cut in November this year with the same risks even after the meeting.”

Emma Lawson, fixed interest strategist - macroeconomics, at Janus Henderson, said: “Our base case is for the RBA to remain on hold at current rates before commencing an easing cycle in Q1 2025. We price a more modest than the historically average easing cycle, of around 175 bps, spread over an extended period.

“The market has built in an RBA easing cycle, with around 100 basis points priced over two years. This is a start, but we believe that there is more to come, as the RBA allows policy to become accommodative over the cycle.”

Harvey Bradley, portfolio manager at Insight Investment, said: “We think this keeps the RBA in a holding pattern for the foreseeable future, likely at least six months leaving rates unchanged and they won’t want the market to perceive either a dovish or hawkish bias at this point.

“This more balanced outlook in the near term is at odds with most other central banks who continue to signal the next move in rates will be down. There has been a significant ‘risk-off’ move in global markets leading up to this RBA meeting. Markets are now pricing in 50 bps cuts from US and European central banks in Q4.”