David Bassanese
2 minutes reading time
As widely expected, the Reserve Bank cut the official cash rate by 0.25% today to 3.6%. The decision to cut rates was unanimous by Board members, and reflected both confirmation of a further easing in underlying inflation in the June quarter (from 2.9% to 2.7%) and a modest softening in labour market conditions (slowing employment growth and a lift in the unemployment rate to 4.3% in June). As the RBA Statement points out, both the recent easing in inflation and labour market tightness were broadly in line with the Bank’s expectations, thereby justifying the continuation of its gradual approach to re-normalising the official cash rate.
More interest rate cuts are likely. After all, inflation is close to the mid-point of the 2 to 3% target band and official interest rates are still on the restrictive side of neutral. Indeed, the Bank’s own forecasts of underlying inflation stabilising at 2.6% over coming quarters incorporate further declines in the cash rate in line with current market expectations.
That said, barring a major growth scare, the RBA does not seem in any rush to cut interest rates. While there are risks to both the global and local economies, these seem relatively well-contained for the moment. Greater certainty around US tariff policy is emerging, with tariff rates less onerous than feared in early April. In Australia, the main risk is a failure of households to lift spending as their incomes continue to rebound, though lower interest rates and likely higher house prices in coming months should eventually lift their animal spirits.
All up, my base case remains that a rate cut on Melbourne Cup day is an odds on favourite – following the release of the June quarter consumer price index report in late October. If the CPI report confirms annual underlying inflation has fallen to at least 2.6% (the RBA’s current expectation) – as I expect – then I fully anticipate the RBA will cut rates to 3.35% on Melbourne Cup Day, Tuesday November 4. I then anticipate further rate cuts at the February and May policy meetings next year, taking to the cash rate to a neutral/slightly expansionary level of 2.85%.
Of course, there is a risk that the RBA cuts rates at the September policy meeting, though we’d likely need to see a notable further easing in labour market conditions – with the unemployment rate rising to 4.5% or more in the next few months.
