Warning ‘nervous' RBA could hold rates
Westpac chief economist Luci Ellis says Tuesday's release of minutes of the Reserve Bank's July meeting and the governor's keynote speech on Thursday reaffirm a rate cut in August is not a lock.
'The monetary policy board clearly remains nervous about inflation and some members want to see actual data to support their expectation that it is still declining towards 2.5 per cent, the midpoint of the RBA's 2-3 per cent target range,' Ms Ellis wrote in an economic note on Friday.
'For this reason, we cannot lock in the cash rate cut in August just yet.'
Despite warning a cut is not a guarantee, Ms Ellis did concede the most likely outcome was a rate reduction in August. Homeowners are warned a rate cut in August is not guaranteed. NewsWire / Nicholas Eagar Credit: NewsWire
Traders have priced in an August rate cut as a near certainty and all 29 market economists surveyed by Bloomberg say the official cash rate will be reduced by 25 basis points.
The market in total expects 75 basis points worth of cuts by March 2026, bringing the official cash rate down from 3.85 to 3.10 per cent.
While economists have been factoring in falling inflation and rising unemployment as a sign to cut, Ms Ellis said they shouldn't be pricing it as a certainty.
'Monetary board members who are still nervous about supply constraints and tight labour markets will want to tread slowly,' Ms Ellis said.
In her speech to the Anika Foundation on Thursday, RBA governor Michele Bullock said the board would take a measured and gradual approach to future rate cuts.
Ms Bullock pointed out year-end trimmed mean – which shows the underlying inflation rate by stripping out the more volatile parts of the economy, including fuel and energy prices – came in at just under 3 per cent for the first time since 2021.
'The monthly CPI Indicator data, which are volatile, suggest that the fall may not be quite as much as we forecast back in May,' she said.
'We still think it will show inflation declining slowly towards 2.5 per cent, but we are looking for data to support this expectation.'
ANZ also came out with a warning saying the next round of CPI data – to be released next Wednesday – could derail an interest rate cut. ANZ said there is a key quarterly inflation figure to watch. Christian Gilles / NewsWire Credit: News Corp Australia
ANZ economists say the central bank will be comfortable cutting should the quarterly trimmed mean figures come in at 0.6 per cent or 2.7 per cent for the year.
But if the number comes in at 0.8 per cent or higher or an annualised rate of 3 per cent they say a cut is unlikely.
Ms Bullock also said the labour market remained tight and the uptick in unemployment from 4.1 to 4.3 per cent in June was not a surprise to the central bank.
Asked if seeing the June unemployment figures, which came out after the RBA's board meeting, would have swayed the board's decision Ms Bullock said: 'I don't think so'.
'The monthly numbers pop up and down … Our quarterly forecast for the unemployment rate to drift up to 4.2 per cent in the June quarter is pretty much on the mark,' Ms Bullock said.
Ms Bullock also said economists overreacted to the figure and it wasn't the 'shock' they were calling it.
'Some of the coverage of the latest data suggested this was a shock – but the outcome for the June quarter was in line with the forecast we released in May,' she said.
She said the board wanted to see a gradual easing in labour market conditions, that has so far been most evident in fewer job vacancies, reductions in hours worked and declining rates of voluntary job switching.
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