Markets are generally expecting a rate cut from the Reserve Bank of Australia (RBA) at the conclusion of Tuesday’s meeting. But there is a wide range of disagreement about what could happen. The majority is inclined for a 25 bps cut. But there are also economists calling for no cut at all, while others say it could be a 50 bps cut. Who’s right? And how will the market react?
The RBA was the last of the major central banks to move towards easing in the current cycle, only getting around to it at the last meeting. That’s in part because of an active economy coupled with increased export prices had kept inflation higher for longer than was anticipated. But now inflation has finally ticked back into the RBA’s 2-3% target range. This has made it open season on the interest rates.
How Much to Cut?
If you ask international economists (like Reuters did last week), the expectation is near unanimous that the RBA will cut by 25 bps. And it will likely leave the door wide open for another rate cut after that. International economists generally agree that there will be three more rate cuts this year.
But Australian economists are not so sure. 88% do agree that there will be a cut, but 10% of those are calling for 50 bps of easing. The remainder, of course, expect interest rates to stay on hold. They do agree with international economists that there will be three more cuts after this one. Of note is a former MPC member at the RBA who warned that it wasn’t time to cut rates just yet, pointing at increased government spending providing the risk for higher inflation.
What Has the RBA Said?
Normally, when there is disagreement among analysts and economists, we can look at what central bank officials have said to find clues about what will happen. But, in the intervening time since the last Reserve Bank of Australia (RBA) meeting, Australia held a general election, returning Anthony Albanese back to his job as Prime Minister. During that time, RBA officials have been especially quiet, as is normal for central bankers during election periods.
That gives us little to work on to figure out what the Monetary Policy Committee is thinking going into the meeting. The last public speaker was Governor Michelle Bullock in the wake of the last meeting, where she made a point of repeating the “uncertainty” narrative from the policy statement. A lot has happened since then, such as the trade deal between the US and China to dial down tariffs. However, most other central bankers around the world have kept up the uncertainty rhetoric, and there is no reason to believe the RBA will be different.
How the Market Could React
Despite the quibbles among economists, the market is pretty much dialed in for a 25 bps rate cut. Meaning that any of the other options would be a surprise and likely move the Aussie substantially. Where the issue arrives is what comes after that.
The market seems inclined to expect another rate hike after this one, a third in a row. But it’s almost 50-50 at this point, meaning that the market could react either way if the Reserve Bank of Australia (RBA) provides signs. But, given the environment, Bullock might opt for being as vague as possible and double down on “uncertainty”. That could give the market a bit of a wobble as traders try to pick over phrases from the press conference to justify their views on whether a rate cut will be coming in short order or not.
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