MNI: RBA To Chart Neutral Path As Global Concerns Mount

The Reserve Bank of Australia is likely to cut interest rates by a further 75 basis points over the next three quarters, beginning with a 25bp reduction at its May 20 meeting, as global trade uncertainty continues to weigh on the outlook – a concern that is also expected to shape the forecasts in its upcoming Statement on Monetary Policy, former RBA staff told MNI.

“[The RBA] is going to really emphasise that uncertainty point – even if there's been a bit of good news, it’s not final,” said Justin Fabo, founder of Antipodean Macro and former head of international financial markets at the RBA until 2012, referring to Monday’s U.S.-China trade war truce.

Fabo said Governor Michelle Bullock is likely to downplay the RBA’s central forecasts following next Tuesday’s policy decision, which is expected to deliver a 25bp cut to the 4.1% cash rate. The Bank of England’s recent communication could serve as a useful blueprint for the RBA, he noted. Bullock will need to strike a delicate balance between guiding markets toward further easing while stressing that policy remains restrictive and the outlook highly uncertain – particularly in regard to global growth and tariffs.

“She’ll likely say the RBA is not on a preset course – which is actually what the BOE said recently,” he continued. The Bank will also shift its emphasis from lagging productivity growth toward inflation and labour market outcomes, he added.

Market pricing of a 3.2% cash rate by December – up from below 3% prior to the U.S. rollback of China tariffs – is now more aligned with reality, Fabo said. However, a sharper and broader global economic deterioration would likely be required to justify a faster pace of easing.

“The cost-inflation backdrop in Australia supports rational arguments for a range of policy paths, but for now, there’s still a degree of caution,” he added, pointing out that  advanced economies have generally not yet fully returned to the midpoint of their inflation targets.

“It warrants some restraint in how quickly they think they can ease,” he concluded.

INTERNATIONAL ISSUES

Martin Eftimoski, an RBA economist from 2017 to 2021, said global volatility and international economic conditions will dominate the board’s upcoming decisions, while domestic factors – such as productivity growth – will likely take a back seat. He suggested that China’s reduced need for stimulus could dampen demand for Australian commodities, reinforcing the case for further RBA easing. The Bank will also need to weigh the risks of additional U.S. liquidity shocks, he added.

“Nothing is clear at this stage – even that pause [on U.S. tariffs on China] is only for 90 days. Nothing’s written in blood,” he said. “The level of global macroeconomic uncertainty, regardless of its direction, will contribute to risk premiums and exert a constrictive effect on the economy. So, the RBA may be justified in loosening credit conditions, even on the basis of volatility alone.”

Tariffs will continue to affect U.S.-China trade even at reduced levels, he added. “The Bank will respond based on data. There’s a clear rationale for a rate cut in May. What’s more uncertain is the timing of subsequent moves and the ultimate terminal rate. If the neutral rate is around 3.1%–3.2%, we still have some way to go.”

Eftimoski said domestic considerations will eventually reassert themselves, pointing to RBA and Treasury assumptions that productivity growth will return to the long-run average of 1% annually.

“The real question isn’t what happens at the next Bank meeting, but what happens two or three quarters from now. The irony is that if we do reach a 3.2% cash rate – or around neutral – it will likely be global economic slowdown and uncertainty that got us there, not a rebound in productivity growth.”