MNI INTERVIEW: RBA To Eye 2025 3% Cash Rate Floor - Ex Econ

The Reserve Bank of Australia’s cash rate is only moderately restrictive at 3.85% and one or two 25 basis point cuts would have little impact on the real economy, a former RBA economist told MNI, arguing a 3% level by year-end as priced by markets would be justified.

“They're probably going to need to do more than that to give growth a bit of support over the next 18 months to two years, given all the other downside risks,” said Justin Fabo, founder of Antipodean Macro and the RBA’s former head of international financial markets.

Fabo, who accurately called the RBA's May cut, said that while the market is pricing in 3% by December – with two cuts in July and August – he doubted the Bank would need to go lower this year. (See MNI: RBA To Chart Neutral Path As Global Concerns Mount) “That's my base case – a lot of the debate is about the next one or two meetings and that’s a coin toss. It doesn't feel like the economy's going to deteriorate from here. The unemployment rate goes up a little bit, but not massively.”

LABOUR MARKET

Fabo said labour market dynamics will largely shape the RBA’s next moves. Despite headline resilience, he flagged a growing divergence between those already employed – who are securing pay rises and promotions – and job seekers facing rising difficulty securing full-time work.

“The labour market is still the most interesting domestic thing, or domestic variable to be interrogating in terms of the outlook for rates over the next year,” he said.
“Can we have a cash rate lower than what it is consistent with the unemployment rate being around where it is?” While the RBA’s projections suggest this is possible, Fabo said the view diverges from historical precedent and international experience, which imply unemployment will need to rise to contain inflation.

“The obvious answer is that it's somewhat temporary and related to our composition of growth,” he said, citing surging healthcare employment, typically associated with lower productivity. “That's supported the labour market, even though we've had weak GDP growth. But I don't think that goes anywhere near fully explaining the difference between what's been happening here and in other places.”

Australia’s unemployment rate remained at 4.1% in May, unchanged from April, though total employment fell by 2,500, well below expectations for a 21,000 increase, according to ABS data.

EXTERNAL RISKS

Fabo also pointed to recent RBA commentary suggesting optimism about China, likely reflecting the impact of fiscal stimulus efforts like the trade-in program. Still, he said the RBA would closely monitor U.S.-China trade tensions and iron ore prices, which have fallen below USD95/tonne, down from USD115 in late 2024.

“It’s not USD110-120, but it's not a disaster. It’s probably more consistent with the property market, which is still deteriorating,” he said, suggesting China’s real-estate sector offered a better gauge for the prospects of iron ore and Australia's economy than trade talks.