Warning on rate cut hopes for 2024 as RBA board meets John Kehoe and Joanne Tran
Feb 5, 2024 – 4.34pm
Former Reserve Bank of Australia official Paul Bloxham says interest rate cuts are a “distant prospect” until 2025, unless governments can impose policies that lift Australia’s sagging productivity to generate non-inflationary economic growth.
Board members including Treasury secretary Steven Kennedy, Carolyn Hewson and Carol Schwartz were photographed as they arrived for the 2pm meeting – the first in the RBA’s new era that stems from a review of the central bank handed down last year.
It was a busy day at the bank with former Commonwealth Bank chairwoman Catherine Livingstone and Australian Banking Association chief executive Anna Bligh there for separate meetings with RBA officials, including Ms Bligh’s crisis talks over the future of teetering cash transit monopoly player Armaguard.
The RBA board met as US financial markets pushed out the first expected US interest rate cut from May to June, following a stronger than expected 353,000 job gains last month and US Federal Reserve chairman Jerome Powell rejecting hopes there would be large rate cuts.
In a rare television interview, Mr Powell reaffirmed that Fed policymakers expected three US interest rate cuts this year, dismissing the idea there could be six rate cuts that some rate traders are betting on.
Local money market traders deferred to August the timing of the first fully priced RBA rate reduction, winding back the chances of a rate cut in the previously favoured June to 57 per cent, according to Westpac.
The benchmark S&P/ASX 200 Index dropped 1 per cent and the Australian dollar sank to its lowest since November at US64.83¢ as the greenback powered ahead on the revised interest rate outlook. Dismal productivity
HSBC’s Mr Bloxham said the market was “all a-flurry with excitement” about potential rate cuts, but RBA observers should “cool their engines”. He predicted the first rate cut would be delayed until early 2025.
“We see the RBA as likely to be one of the last of the developed-economy central banks to deliver cuts,” Mr Bloxham said on Monday.
“The RBA was one of the last to start hiking, lifted rates by less than many others and inflation is falling more slowly in Australia than in, say, the US.
“A deeper factor at work is that Australia’s productivity performance in the post-pandemic period has been one of the poorest across the developed world.”
The 2 per cent fall in local labour productivity over the past year and 4 per cent rise in wages meant the costs for business of producing goods and services had risen “well in excess of what is consistent with the RBA’s 2-3 per cent inflation target”, he said.
“Australia’s productivity performance is distinctly worse than elsewhere.”
Mr Bloxham said broader reforms to tax and competition should be on the agenda, while he questioned the potential negative impact on productivity from the government’s workplace relations changes.
“The best thing for [government] fiscal policymakers to focus on would be supply side reform that lifts productivity. This would help to lift living conditions, but also reduce the cost of living – aka inflation – sooner.
“Without a lift in productivity, rate cuts may be a distant prospect. If productivity can be improved, rate cuts could be considered sooner.” Shadow board has rates on hold
The so-called RBA shadow board of academic and market economists attached a 61 per cent probability that keeping the cash rate steady was the appropriate policy, while estimating a 32 per cent probability that the rate should increase and 7 per cent probability that it should be cut on Tuesday.
“The monetary tightening is making itself felt in the Australian labour market,” the shadow board noted.
“The official seasonally adjusted unemployment rate increased in December 2023, though, at 3.9 per cent, it remains historically low.
“Overall, though, the labour market is weakening, it is doing so gradually and proving surprisingly resilient.”
Members of the shadow board are JBWere chief investment officer Sally Auld, Westpac Business Bank economist Besa Deda, University of Queensland professor of economics Begoña Domínguez, Australian National University economist Timo Henckel, University of Sydney professor Mariano Kulish, University of Melbourne economist Guay Lim, University Sydney economic professor James Morley, Macquarie University economics professor John Romalis, Centre for Independent Studies chief economist and former RBA official Peter Tulip, and ANU professor and former RBA board member Warwick McKibbin.
Local international trade figures for December published on Monday showed the trade balance for goods was a surplus of $11 billion.
Exports rose by 1.8 per cent in December and imports lifted by 4.8 per cent.
T. Rowe Price portfolio manager Scott Solomon said the RBA would try to lean “hawkish”, similar to the US Federal Reserve last week.
“We believe the Fed has created a nice template for the RBA to follow.
“While we do expect the RBA will be forced to cut sometime this year, it will be after the Fed begins its cutting cycle which now appears won’t start until May at the earliest.
