The Reserve Bank of Australia (RBA) announced their decision to hold rates. This decision incited a battle lines among board members, with three of them supporting a reduction in the rate certainty. The board’s six to three majority voted sharply against raising rates. This decision has since led to much vigorous debate among economists and market professionals regarding the future path of monetary policy. This decision has been very much shaped by the context – not just the global economic situation but Australia’s own domestic economic performance.
At the recent board meeting, this same minority argued hard and successfully for a much deeper rate cut. They even made the case that restrictive U.S. tariff policies would restrict global economic growth, including hurting Australia’s interests. In their last meeting, they indicated that economic growth in Australia continued to be lacklustre. Saving buffers were replenished by households as the pace of wage growth moderated and services inflation began to decelerate. In reply, they advocated for an even more hawkish monetary policy posture.
As many as six of the board members viewed the recent economic indicators as more encouraging than expected. In their view, it could be premature to pursue additional changes to monetary policy at this time.
Divergent Views on Economic Conditions
And like the minority faction on the RBA board, ASIC has serious concerns about the fragility of the Australian economy. They focused on the fact that households were saving more and pointed to the evidence that wage growth was flat lining. The data pointed to a rolling over in services inflation—which they took as a sign of the harder economic landing hitting everywhere.
Moreover, they cited new data showing a significant loss of momentum in economic activity. The unemployment rate rose from 4.1 percent in May to 4.3 percent in June, prompting worries about job growth and its sustainability.
“Monthly indicators of inflation had been marginally higher than were consistent with the staff’s forecast for underlying inflation in the June quarter,” – RBA minutes.
This point of view greatly highlighted their case that because growth was lagging, a rate cut was in order to stimulate growth and reverse these bad trends.
Most of the board members saw the newest economic numbers as a positive development. Second, they contended that global economic results have outperformed expectations. This series of encouraging outcomes gave them the confidence to hold the line on interest rates for now.
The Case for Rate Cuts
The minority’s case for a rate cut was predicated on several compelling arguments indicating that the RBA needed to do something significant. They determined that there was strong evidence to support. This means that inflation can go on a sustainable downward trajectory towards the midpoint of the RBA’s target range or even lower.
“The case to lower the cash rate target at this meeting rested on a view that there was already sufficient evidence to be confident that inflation was on track to be sustainably back at the midpoint of the target range, if not lower,” – RBA minutes.
Their position is that waiting to ease further is an undesirable path. The substantial and long and variable leading lags in monetary policy’s effects on economic activity and inflation mean that decisive action is imperative.
Most notably, they warned us that our growth projections were overly optimistic. In particular, they asked if jobs in the private market sector could make up for a deceleration in non-market sector job growth.
“Moreover, there was uncertainty around whether market sector employment growth would increase by enough to offset an expected slowing in non-market sector employment growth to maintain momentum in overall employment growth,” – RBA minutes.
Their concerns motivated them to push for an immediate rate cut. They had the foresight and determination to think ahead of a future economic downturn.
Future Monetary Policy Outlook
Indeed, already looking ahead after the RBA’s surprise move to hold rates steady, some analysts were predicting that the RBA will bring forward its next cut. At least by current market pricing, there’s more than a 100 percent probability of a rate cut by August. In addition, most economists are anticipating another cut in November 2023 with a third cut likely in early 2026.
Even with this happy market sentiment, many economists aren’t ready to get too excited. Belinda Allen from CBA noted that the majority of the RBA board has adopted a dovish approach. This casts significant doubt as to whether we can expect a rate cut this August.
“The level of caution from the majority of the RBA board keeps in doubt what the market has assumed is a certain rate cut in August,” – Belinda Allen.
Some market analysts have gone as far as predicting the RBA’s terminal rate forecast to be below the analyst consensus of 3.1 percent. That indicates a high probability of more spending easing ahead.
