The RBA has bitten the bullet and started the easing cycle. This would have been a line-ball decision for the RBA, as is made clear by frequent references to ‘continuing risks’ and ‘uncertainties’ in its statement. The economy is sluggish but the labour market remains resilient. Inflation is trending down but it is extremely difficult to get a good read on where inflation is tracking now and whether it will be sustainably inside the RBA’s target range in the coming months. The cost of living measures introduced by federal and state governments’ have impacted how CPI is measured and this needs to be taken into consideration when relying on them as a guide for inflation pressures.
The RBA is between a rock and a hard place. As is made clear in today’s RBA statement “...forecasts published today suggest that, if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range”. If underlying inflation is persistent and outside of its target range then starting the easing cycle exposes the economy to upside inflation risks that are still lurking. These upside risks include pressures from fiscal policy in an election period, low productivity growth, and the inflationary impact of protectionist policies around the globe.
On the other hand, keeping rates elevated exposes a fragile economy to risks on the growth side. The current level of government support needs to be reviewed in this context. Sluggish productivity growth will eventually weigh down the labour market. Tariffs and other trade barriers will be a headwind to growth.
KPMG’s central case continues to be that there will be three rate cuts in total this year with one more in the first half and another in the second half. Having started the easing cycle, the RBA would ordinarily reinforce this move with another rate cut at the next meeting, but there is no certainty on this in the current circumstances. If underlying inflation continues to persist above, or towards the top end of, the target range then the upside risk factors will come squarely into play and the newly implemented RBA board may err on the side of waiting to see how these risks play out before cutting rates further. This is reflected in the RBA Statement which acknowledges that “the Board remains cautious on prospects for further policy easing.” An interesting feature of today’s RBA statement is the emphasis on “... inflation moving sustainably towards the midpoint of the 2–3 percent target range”. This appears to flag reluctance by the RBA to tolerate persistent inflation around the top end of its target range.
All attention over the coming months will be on how stimulatory government policy will be in an election period; how closely wage growth and productivity growth align; and how geopolitical risks and tariff and trade barriers feed into prices.
Read the RBA Media Release: Statement by the Reserve Bank Board: Monetary Policy Decision
For further information
Ian Welch
KPMG Communications
0400 818 891
iwelch@kpmg.com.au
