RBA Poised for ‘Hawkish Cut’ as US-China Reprieve Boosts Outlook

rgsd0r44m4i00]b}6uing[l)_media_dl_1.png Australian Bureau of Statistics

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(Bloomberg) —

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Australia’s central bank is set to lower interest rates for a second time this year as price pressures ease and US-China trade tensions take a pause, though lingering risks around both suggest the board will remain cautious on the policy path ahead.

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Economists and money markets expect the Reserve Bank will announce a quarter percentage-point cut on Tuesday to bring its cash rate a two-year low of 3.85%. They reckon Governor Michele Bullock will be reluctant to suggest further easing to come when she appears before journalists at 3.30 p.m. Sydney time, an hour after the rate decision is released.

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“Recent events raise the probability of a hawkish cut at the May meeting, with a pause being a tail risk,” said Nicholas Chia, Singapore-based strategist at Standard Chartered Plc. He was referring to recent stronger-than-expected price and labor data and a 90-day trade truce between the US and China.

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Since the RBA’s March 31-April 1 meeting, data showed hotter-than-expected inflation, a surprise acceleration in wages and a tight job market. That suggests the RBA has “no reason to give any additional encouragement to the market’s rate cut hopes,” said Sean Keane, chief Asia Pacific strategist for JB Drax Honore, referring to pricing for two more cuts after Tuesday’s meeting.

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The RBA will also publish the staff’s quarterly update of macroeconomic forecasts on Tuesday, with economists predicting a downward revision to inflation, GDP and employment growth. The RBA doesn’t publish a dot plot or predict a rate a path, instead using market pricing as a reference for its economic outlook. 

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“The staff will be re-emphasizing their view that the labor market is tight and that wages growth above 3% isn’t a comfortable position to be in with zero productivity gains,” Keane said.

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The RBA has narrower scope for easing after it opted not to hike as much as global peers during the post-Covid tightening cycle. Having taken longer to restrain inflation, Australia’s monetary policy is ironically now more restrictive than New Zealand and Canada’s and broadly on a par with the US and UK given they all cut at a faster pace. 

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The RBA aimed to hold onto labor market gains as it slowed price growth — a delicate balance that has drawn some criticism. But it seems to be paying off with core inflation returning to the 2-3% target last quarter for the first time in more than three years and unemployment hovering around a very low 4%.

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Su-Lin Ong, chief economist at Royal Bank of Canada, reckons the RBA is in policy “nirvana,” while Credit Agricole CIB’s David Forrester described it as a “Goldilocks situation” which calls for a “hawkish cut.” Citibank Inc.’s Josh Williamson sees “a credible scenario” where the RBA decides to leave rates unchanged at 4.1% on Tuesday and former board member Warwick McKibbin insists it should. 

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Australia’s productivity growth remains anemic while uncertainties remain about the impact of a tight labor market on firms’ wage- and price-setting behavior. Bullock has previously said that the board needs to see an improvement in productivity in order to be comfortable that wages can rise without rekindling inflationary pressures.