July RBA cash rate cut now expected, moved forward from August, but this is no shoo-in.
- We now expect the next RBA rate cut to be in July rather than August, but this is not the shoo-in the market seems to think it is.
- The RBA has sometimes defied market pricing if offshore risks are being over-weighted, but now is the time to bring forward a move it knows it will likely make soon anyway.
- The RBA’s outlook is still shaped by concerns about the tight labour market, slow economy-wide productivity growth and the pricing implications of recovering demand. Thus we expect non-committal, even grudging, language in the post-meeting communication.
- We continue to expect a terminal rate of 2.85% (three further cuts after the upcoming one), but the RBA is unlikely to give any forward guidance in that vein.
The next RBA rate cut is now expected to be in July rather than August, but this is not the shoo-in that markets seem to think it is. Yes, the May monthly CPI indicator came in below even the low number that we expected. That helps bring forward inflation’s return to the 2.5% target midpoint and keep it there, which is what the RBA is trying to achieve. The detail around housing and market services was also a promising sign that core inflation is seeing a sustained moderation. But the June quarterly inflation numbers are still likely to print on the high side, so some caution on the inflation outlook is likely and warranted.
One month’s data ordinarily wouldn’t – and shouldn’t – determine the RBA’s forecast and decision-making. We also note the Governor’s particular caution about the monthly CPI indicator expressed in the May post-meeting media conference. This was an explicit steer that the RBA’s thinking in May was that it did not plan to do back-to-back cuts but would wait for the quarterly CPI ahead of its August meeting. And they still might do that, but it is harder to justify now.
Moving more quickly than the ‘cautious and predictable’ path flagged in May implies that the RBA’s forecasts need to shift. The May SMP showed a forecast for trimmed mean inflation flat as a pancake at 2.6% as far as the forecasts went, never touching the 2.5% midpoint. No model produces a forecast like that. It was more of a message than a true forecast.
That message was that they are still worried about domestic inflation pressures. They think the labour market is still too tight – and productivity growth too weak – to move quickly. Last week’s labour force and today’s job vacancies data would have reinforced this view. Neither is the RBA planning to bring monetary policy to an expansionary stance – this point was also explicitly mentioned in the Minutes.
That 2.6% forecast was the RBA saying it thought it would end up cutting by less than the market was pricing in May, the path on which the RBA’s forecasts were based. Discussion of a 50 basis point cut at the May meeting was just that – discussion. Recall that the Board also discussed keeping the cash rate on hold.
We expect that the inflation evidence will overtake the RBA’s thesis of domestic tightness over time. But we do not think they are going to start singing from an entirely different song sheet just yet. It would be an extraordinary pivot to let go of an analysis of the economy that it has held on to for so long – even in the face of widespread criticism – without any prior communication. And it would be inconsistent with the RBA’s recent pattern of taking a couple of quarters and a bit of counter-arguing before it comes back from a view that is well outside market consensus. (Though with more than a week to go until the next Board meeting still, perhaps an event will be rustled up beforehand.)
Rather, what we are about to see is an RBA that was planning to cut rates soon anyway deciding it may as well get on with it rather than make a contestable argument for further delay.
Note that this is not just about validating market pricing. The RBA is not the Fed: it is less worried about ‘surprising the market’, as we saw in May 2023. If it really did not think it should cut the cash rate soon, it would not be swayed by the market. Indeed, the RBA has form for not cutting rates when markets are pricing a cut, especially if market pricing is keying off assumed negative implications of shocks from offshore that the RBA thinks are overdone. There is an element of that situation currently, a point alluded to in the Deputy Governor’s remarks in late May.
In short, only because the RBA sees itself on a path of cutting rates soon will it decide to validate market pricing and get on with the next cut at its July meeting. But this is not the timing it previously thought it would be on. Given the lingering uncertainties and the RBA’s concerns about a tight labour market, expect its post-meeting language to be non-committal, even a little grudging about the decision to cut.
We still think there are three further cuts after the next one (terminal rate 2.85%), but the timing will depend on the RBA’s post-meeting tone. As flagged when we first added the third and fourth cuts to our call, the risks are that they come sooner than February and May next year.
