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    • Could the RBA not cut interest rates at all? – Hans Lee
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    Could the RBA not cut interest rates at all? – Hans Lee

    Online Niel Posted on

    The prospect of the Reserve Bank of Australia’s first interest rate cut this cycle continues to be dismissed. And while Moody’s may argue that “hope is on the horizon”, there’s no denying that an ultra-tight labor market, alongside a protracted process of disinflation, has made the RBA’s task that much more difficult.

    This challenge was made all the more apparent last week when the September jobs report was released. The report showed the Australian economy added more than 64,000 jobs. Economists had forecast a gain of just 25,000 jobs. The unemployment rate also held steady at 4.1 percent, continuing both the most remarkable run for the economy and the biggest scratch for the forecast.

    At one extreme, some economists still believe inflation will fall quickly enough for the RBA to cut rates this year. At the other extreme, the strength of the labor market may result in the RBA not cutting interest rates at all. One person who takes this view is Paul Bloxham, HSBC’s chief economist in Australia. His full quote is below for you to read and reflect on:

    Source: HSBC
    Source: HSBC

    So does Bloxham make sense? Joining me for this month’s episode of Signal or Noise are the aforementioned Gareth Aird, Head of Australian Economics at the Commonwealth Bank, and Diana Mousina, Deputy Chief Economist at the AMP.

    Note: This episode was recorded on Wednesday, October 23, 2024. You can watch the show, listen to our podcast, or read the edited summary below.

    Other ways to listen:

    EDITED SUMMARY

    Topic 1: Markets hope for early start to RBA rate cut cycle

    Both Diana and Gareth agreed that this week’s Australian inflation report will prove to be the final difference between an RBA rate cut before 2025 or a cut after the New Year. But Gareth, who remains firmly in the cut camp before 2025, says there are further reasons to believe the RBA can start cutting interest rates. These mainly come from a few insightful data signals:

    • PMI (Purchasing Managers Index)
    • NAB Business Survey
    • The Melbourne Institute’s monthly survey of consumer sentiment, which closely tracks inflation expectations

    Gareth’s RBA call: An RBA rate cut in December 2024 is (still) possible

    While his conviction on this base call was reduced following September’s jobs report, Gareth has for some time supported a call for rate cuts ahead of 2025, even as many industry compatriots have caved. But Gareth backed this view not only because he believes inflation will fall significantly, but also because Q3 GDP is likely to be weaker than investors and the RBA expect, given that consumer spending is likely to not have increased even with the stage 3 tax cut.

    Gareth’s chart: Inflation tracked in six-month moving averages

    Source: ABS, CBA, Macrobond
    Source: ABS, CBA, Macrobond

    Diana’s RBA call: An RBA rate cut in Q1 2025 is the base case – but timing isn’t

    Earlier in the year, Diana and the AMP team thought it was possible to see three rate cuts in 2024, but have since pushed that view to Q1 2025. But instead of keeping a firm time for the first rate cut, Diana claims that the exact moment. it matters less. Rather, it is more important that investors expect an interest rate cut in the next (generally) six months.

    Diana’s Chart: Unemployment Compared to Pre-Covid Averages

    Source: Macrobond, AMP
    Source: Macrobond, AMP

    Extended Chat: Could the RBA not cut interest rates at all?

    Diana finds it very difficult to agree with Paul’s point of view, given that every other major central bank is cutting interest rates. This is especially true because interest rate cuts in Australia have had a much faster effect on households than in other parts of the world. In fact, Australian mortgage rates have risen more and real household disposable income growth has fallen faster during our rate hike cycle than all our major peers combined. She believes Paul’s view may be centered on inflation, but also argues that forward indicators say otherwise.

    Gareth adds two more points. First, if the RBA didn’t cut rates, it would imply that the central bank thinks we are at “neutral” (the short-term interest rate that would prevail when the economy is at full employment and stable inflation) and certainly not in “restrictive territory”. But the other, which he says is the caveat that could validate Paul’s concerns, surrounds fiscal policy. If the government were to initiate another major splash of cash before the federal election in 2025, and the RBA had not yet cut interest rates, then additional spending could prove to be a major risk.

    Topic 2: Markets hope for more stimulus commitments from China

    Gareth: Noise – With no official announcements possible until the National People’s Congress, Gareth thinks that hope is quite loud. Such an announcement may not come until after the US election result is confirmed.

    Diana: SIGNAL – The stock market move behind this major stimulus pledge is the signal itself. While brokers will try to work out whether the stimulus could be 5 or 6 percent of GDP, the truth is we don’t know how much it will be until they say it and start handing out the money. For now, all we know is that it has the potential to be the single largest stimulus package of 2008.

    If more stimulus comes from the Chinese government, what should investors do to prepare for what’s to come?

    The answer is not necessarily to buy Chinese stocks here, Diana says, unless you have a very healthy risk appetite and time to watch individual announcements carefully. After all, many have tried to play fire with Chinese stocks and got burned in the process.

    Topic 3: Markets continue to hope for a soft landing – despite geopolitical risks

    Gareth: SIGNAL – The hopes of investors here, says Gareth, are not misplaced. However, the problem with this business cycle is that a “soft” or “hard” landing will likely not be driven by inflation, but rather by the labor market. Given that Australia’s labor market has continued to remain tight (via a very low unemployment rate), you could say that the soft landing is on track here.

    Diana: SIGNAL – The AMP team’s forecasts are for GDP growth in Australia improve hence, suggesting that the soft landing theory has passed. Note that this GDP growth will not be strong and certainly not at the 2-3% levels Australians have been used to. Finally, as always, soft and hard landings are aggregate terms. Different citizens working in different sectors and in different financial circumstances means that soft and hard landings are truly an individual perspective in this economy.

    The signal or noise will be back in early November with our annual property show. Diana and I will be joined by Andrew Schwartz from Qualitas and Louis Christopher from SQM Research.

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