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- General Research Insights
Could the RBA miss the easing phase altogether?
Around this time last year, we were firming up our view that rate cuts were not likely in 2024, a view we retained through the year, and which was out of consensus at the time. We argued that inflation would prove to be sticky in Australia, falling only slowly, because the RBA had hiked by less than others, local productivity growth was weak and we expected fiscal policy to become expansionary, amongst other factors.
As 2025 approaches, we face a similar question – when will cuts arrive?
Our answer is to expect a very shallow easing phase starting from mid-2025, if there is one at all. The risk is increasing that the RBA could miss the easing phase altogether.
The economy is still operating beyond its full capacity, which is supporting growth in the economy’s cost base
The domestic economic story continues to be such that near-term cuts are unlikely – as the RBA indicated last week. The economy is still operating beyond its full capacity, which is supporting growth in the economy’s cost base that is too high to be consistent with the RBA’s 2-3% inflation target. Public demand is also expanding and with an election due by May 2025, it is hard to see fiscal policy becoming more contractionary. The supply side of the economy remains weak, with productivity no higher now than it was in 2016 and policy measures do not appear to be helping to lift it.
The RBA itself continues to highlight that it took a different approach from other central banks, that monetary policy is less tight than elsewhere, and it is clear that core inflation is falling more slowly than in other economies (see the two charts below from last week’s RBA statement).
Beyond the near term, the global story matters more, as is often the case.
Here there is considerable uncertainty, but we see the risks as starting to tilt to a more hawkish RBA as well.
If the incoming US administration delivers much of what was said through the campaign – on trade policy, immigration, and expansionary tax cuts – this is likely to mean some upside risk to global inflation. This is also generally how markets appear to have read the situation.
However, even before the US election, this upside risk was building, in part reflecting that central banks around the world – including the US Federal Reserve – were cutting rates and seeking to start supporting growth. It looks increasingly likely that by the time Australia’s domestic inflation has fallen enough to allow rate cuts, the global economy could be re-inflating.
That said, there are other scenarios. For instance, if the US administration delivered sharply higher tariffs that result in much weaker growth in China, it could reverberate through lower commodity prices and weaken Australian national incomes. This could lead to lower local inflation if the downturn was big enough, although it would depend on how the Australian dollar responds. It is also important to consider the extent to which China’s policy response to this sort of action – which would be likely – could be commodity-intensive and thus supportive for Australia.
Another consideration is that a ratcheting up of trade tensions with the US could also see China needing to redirect more of its manufactured exports to other markets, which could lower Australia’s import prices and contribute to disinflation locally.
It’s a complicated picture with considerable uncertainties.
In sum though, we believe the near-term story is that the RBA can’t cut because of domestic conditions. Just beyond that, global developments are likely to play an increasing role and if the recent developments mean higher global inflation too, this could make it hard for the RBA to cut at all.
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