Yahoo Finance Interest rate cuts from RBA needed to stop Centrelink lines forming
The RBA will be watching the economic data closely to see when the first rate cut in the cycle will be delivered.
One of the key economic themes for 2024 will be incessant speculation about the timing and extent of interest rate cuts from the Reserve Bank (RBA), and this speculation hasn’t changed after the board’s first meeting of the year.
The market is still pricing in a series of interest rate cuts over the next six to 18 months, even though the RBA - in its latest statements on the economy - was non-committal about the direction of the next move.
Governor Michele Bullock painted a number of key themes that will feed into the debate about the pressures on interest rates. While there was no specific information from Bullock about the likelihood of cuts during this year, the commentary was dominated by “downside risks” to the economy, which only confirmed market expectations for lower rates.
Critical parts of the update from the RBA were its revisions to its forecasts for the economy and how those forecasts are cobbled together.
In simple terms, the RBA has revised down the outlook for inflation, having been too pessimistic about the fall in inflation in its previous forecasts from November 2023. At the same time, it revised down – slightly – the outlook for economic growth and, as a result, revised up the unemployment forecasts over the next two years.
One would assume this outlook demands lower interest rates.
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How the RBA crafts its forecasts
The central bank makes an assumption, not a forecast, about the path for interest rates when assessing the medium-term outlook for GDP, inflation and unemployment, among the other parts of its forecasts for the economy.
In its wisdom, the RBA takes market pricing for interest rates and the views of a few select market economists when putting in an assumed interest rate outlook as it crafts its forecasts. For the updated forecasts, the RBA incorporated 115 basis points of interest rate cuts by the middle of 2026.
115 points of cuts!
The critical point coming from this - for those interested in the outlook for the economy - is that, even with this implied monetary policy outlook for a series of interest rate cuts, the RBA is still forecasting higher unemployment, ongoing weakness in the economy, and continued deceleration in inflation.
Looked at another way, if the RBA assumed steady interest rates over the next two years rather than cuts, economic growth would be even lower, inflation lower still and the unemployment rate markedly higher.
This is why interest rate cuts are needed.
Of course, the RBA forecasts are subject to change, as global and domestic economic and market events unfold. By way of example, developments in Australia’s main export market, China, can deliver both positive and negative risks to the economy. So too can unexpected moves in other parts of the global economy. Even how the local economy changes – in areas such as the housing market, wages, budget policy – will feed into the accuracy or otherwise of these forecasts.
Suffice to say, on the RBA’s present understanding of the economy, the glide path is to lower inflation, accompanied by higher unemployment, even with 115 basis points of interest rate cuts over the next two years.
As things stand, that outlook for interest rates looks fair, although the first cut could come earlier than the market is currently expecting.
The RBA meeting on May 7 will have before it the next quarterly inflation data, several more months of labour force inflation and the GDP result for the December quarter. It will also know where the US Federal Reserve, the European Central Bank, the Bank of Canada and a range of other central banks have taken their monetary policy.
If, as looks likely, the Australian GDP result is weak, inflation continues to track lower and unemployment is on its way to 4.25 per cent, a rate cut will be on the table.
Like the rest of us, the RBA will be data watching to see when the first rate cut in the cycle will be delivered.
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