Case for RBA rate cut not “rock solid” but enough: Analysts

Ahead of the Reserve Bank of Australia’s (RBA’s) next monetary policy decision tomorrow, market experts and economists have confirmed the central bank is expected to cut the official cash rate by another 25 basis points.

According to Finder’s RBA Cash Rate Survey, 88 per cent of the 34 experts polled agreed that the central bank will make another consecutive cut and bring the interest rate down to 3.6 per cent, with the consensus indicating that a reduction was due after the most recent measures of both headline and core inflation fell within the RBA’s two to three per cent target band.

“We’ve seen two cash rate cuts already, but homeowners are chomping at the bit for more,” Graham Cooke, Head of Consumer Research at Finder, said.

“Inflation is continuing to reduce, which means the RBA is likely to cut and the banks will be under a lot of societal pressure to pass on the full rate cut again in July.”

This sentiment was also echoed by Paul Bloxham, Chief Economist, Australia, NZ & Global Commodities at HSBC, who said the the RBA had changed its “rhetoric” at its last policy meeting in May to one willing to cut the cash rate further as long as inflation continued on its declining trajectory.

However, Bloxham noted that singling out the depressed GDP figures, monthly Consumer Price Index (CPI) indicators and ongoing strength of the local labour market could “leave the RBA cautious” and point towards more of a hold.

“In addition, the GDP figures which were published in early June surprised to the downside, which, on their face, should encourage the RBA to consider cutting. That said, the weakness in the figures was mostly due to a fall in public demand, with a modest upswing in private sector activity still appearing to be underway,” he said

“The weak GDP figures alone would not necessarily be enough to get the RBA to cut in July, in our view, but together with the weaker monthly CPI figures support the case to cut.

“In the local economy, the other key factor is the jobs market. Here the outcomes are still strong. The unemployment rate has continued to track sideways, as it has done for the past 15 months, and there has been a recent modest rise in job vacancies. It remains the case that wages growth is still running too quickly, given that productivity is falling, which is leaving unit labour cost growth running strongly. We see this as unlikely to stand in the way of a cut in July, but it should leave the RBA cautious.

“The global backdrop should also encourage the RBA to consider cutting further. Global growth is expected to slow as high policy uncertainty weakens activity and the front-loading effect, ahead of forthcoming US tariff changes, is expected to roll-off in the second half of the year, weakening activity. On net, we see this as disinflationary for Australia.

“In sum, while the case to cut is not rock solid, and there are some lingering risks that inflation could remain sticky, we see enough evidence to get the RBA to cut by 25bp in July. We expect the Governor to repeat that the RBA continues to focus on inflation, and if it comes down fast enough, more cuts will be likely.”

Similarly, 76 per cent of Finder’s 25 experts predict another cash rate cut in August and a further 52 per cent expect a further cut in November.