RBA watch: Sticky inflation will prevent RBA from cutting notwithstanding the FED’s bold action
As the Fed initiated a global easing cycle with a larger than expected 50 bps rate cut this week, the Reserve Bank of Australia (RBA) could arguably move forward lowering the cash rate. In fact, the aggressive 425 bps rate hike since early 2022 has not only contained household disposable income but also reduced consumption on the back of rising mortgage payments. With these developments, the net saving rate has dropped closer to 0% (Chart 1).
While the slowing economic cycle has been easing inflation, July’s CPI remained above the RBA’s 2-3% target range (Chart 2). In fact, inflation pressure has been strong even with declining job vacancies by about -20% YoY. In the same vein, the leading indicator for employment, point to a weaker labor market. The unemployment rate at 4.2% in August is below the natural rate of unemployment estimated between 4.5% and 5.0% by the Australian Treasury. However, from a macro perspective, the output gap is still positive or neutral at best according to the RBA’s analysis (Chart 3). All in all, a rate cut does not seem fully justified yet although it is clearly the direction of the next move.
Down the road, if the Aussie strengthens on the back of larger interest rate differential between Australia and the US, the RBA could follow the Fed by easing towards the end of this year. However, the Aussie has been rather flat after the Fed’s decision, which is hardly enough to convince Governor Bullock that inflation is returning to target. On the other hand, a pre-emptive rate cut could even strengthen inflationary pressure from a weaker Aussie. In fact, the futures market is well divided whether the Reserve Bank could deliver a rate cut in the next three months.
All in all, we expect the RBA to keep the status quo in September by keeping a hawkish stance to contain inflation expectations and wait a bit longer to start cutting.
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