RBA loosens the sails in light economic winds, but will keep a steady hand on the tiller
At its second meeting today, the new RBA Monetary Policy Board has cut the cash rate by 25bp, to now sit at 3.85%. The move was no surprise (though some had tipped a double-cut) given that the four conditions Governor Bullock said were necessary for rate cuts – declining services inflation and housing inflation, a general easing in overall inflation and contained wages growth – had been broadly met.
KPMG believes the satisfying of these criteria, combined with the continued weakness in the private side of the domestic economy, meant the RBA was correct to pare back the cash rate to a less restrictive position. But the next step for the Board will be less straightforward than today’s decision – we are unlikely to see consecutive drops in the cash rate, due to a mixture of global economic uncertainty and local concerns surrounding the re-emergence of inflation pressures.
In particular, while wages growth has been contained, it did tick up in the latest March quarter WPI, with notably stronger growth in the public sector than the private sector. Without a rise in productivity growth across the economy inflation risks cannot be dismissed lightly, especially in an environment where employment growth has been concentrated in the non-market sectors of the economy.
This labour market dynamic is contributing to the maintenance of unemployment rates below KPMG’s estimate of what the unemployment rate should be at full employment (or NAIRU). It is this fact that makes the current easing cycle unusual, as the RBA has historically loosened monetary policy conditions in alignment with weakening labour market conditions (and conversely, tightened monetary policy with a rising inflationary environment), which is not the case today; although the RBA does appears to be slower in reducing the cash rate in this cycle than it has in the past.
While core inflation has just edged back into the target band, it remains sticky; which can be seen through the fact that every household cost-of-living measure is still recording inflationary pressures above CPI. Despite some arguing that headline inflation is entrenched below the target band midpoint, it remains an uncertain measure until the government cost-of-living relief rebates/packages come to an end and enable a clear picture of headline inflation to reemerge. We anticipate that headline inflation will pick up again as the remainder of this year progresses, and the latest CPI data does show, worryingly, that goods inflation has started to rebound, now that post-COVID supply chain impacts have bottomed out and re-normalised.
Added to all of this, the global uncertainty surrounding economic growth and inflation from the fallout of the new US Administration’s trade and tariff policies suggests it is also prudent for the RBA Monetary Policy Board to take a more cautious approach to the easing trajectory for the cash rate. Such an approach will also help contain house price inflation, which, due to continued lacklustre supply side outcomes and strong underlying demand side pressures (driven from strong population growth), is likely to “bounce” if the cash rate is cut too quickly, and by too much.
Whule the RBA statement today does not include clear forward guidance, KPMG expects the cash rate will be eased further this year to 3.60%; meaning one more 25bp cut is anticipated during the remainder of 2025. This is most likely to happen during the September quarter, as more data on the performance of the Australian economy is released and as the US Administration firms up its trade policy.
Statement by the Monetary Policy Board: Monetary Policy Decision | Media Releases | RBA
For further information
Ian Welch
KPMG Communications
0400 818 891
iwelch@kpmg.com.au