Luci Ellis. She is a former member of the Reserve Bank of Australia’s decision-making body and current chief economist at Westpac. Her understanding of the economy indicates to us that interest rates will be cut by the RBA at their next meeting. This is right in line with a dramatic cooling of inflation.
For half of this year, inflation figures released each month have shown slowing in the growth of consumer prices. Recent data shows that inflation has dropped to 2.1 percent, sitting at the lower end of the RBA’s desired range of 2 to 3 percent. The sharp changes in inflation appear to have caused a monetary policy wake-up call. Financial markets have reacted by pricing in a nearly 100 percent chance of interest rate cuts.
Implications of Inflation Trends
The RBA shocked a number of observers in financial markets by holding pat on interest rates at its last meeting. Analysts were anticipating a 25 basis point cut. The last inflation reading has flipped that script. In particular, the June quarter report surprised media and politicians alike with an unexpected 2.7 percent jump in consumer prices.
Ellis noted, “It turns out the governor was right to be cautious with annual trimmed mean inflation in the quarterly CPI report of 2.7 percent, notably higher than what the May monthly report had suggested.” This patient approach is indicative of a greater realization that economic signals are volatile, requiring a patient approach to changes in interest rates.
The headline unemployment has gone up, ticked from 4.1 percent up to 4.3 percent. This change is further evidence that the labor market is starting to cool. These shifts in job numbers only add to the mixed economic signals, affecting consumer sentiment and spending habits.
Rate Cuts Forecast
Looking ahead, Ellis has projected multiple interest rate cuts: “My base case remains that the RBA will cut rates in August and then again in November and February,” she stated. Overall, there’s nothing in this forecast to surprise the market. This shows it is willing to take a proactive approach and respond quickly to economic conditions as they change.
Financial markets now see a likely cut in August tied to this decision as a done deal. The RBA governor has suggested that such cuts are now a question of timing, not necessity. With inflation trending lower and the job market weakening, there is growing consensus that adjustments to monetary policy are warranted.
Ellis emphasizes the importance of timely action: “Because (monetary) policy operates on the economy with a lag, you actually kind of need to already be there, so there’s not really a good argument for a continued hold.” This viewpoint makes clear the need for RBA to change its modus operandi to be more beneficial to economic stability.
Future Economic Outlook
The underlying measure of inflation remains unchanged at an annual 2.6 percent. This paints the picture that despite the decline in headline inflation, core inflationary pressures are still present. For Ellis, the key now is to assess that larger economic landscape. She knows from experience it’s important to stay ahead of the curve on interest rates.
“We think there are two more rate cuts after that, assuming our forecasts for inflation are what turns out to be the actual,” Ellis added. Her comments are indicative of an increasing belief that the RBA will successfully sail these straits without getting left too far behind.
