- The Reserve Bank indicates that the next step is an interest rate cut
The Reserve Bank has given a strong indication that interest rate cuts are on the way, even though inflation is still too high.
The minutes of the RBA’s December meeting, released on Tuesday, suggest the next step is now likely to be a cut if inflation falls at a faster pace towards the two to three per cent target.
“If that were to happen, members concluded that it would be appropriate in due course to begin easing the degree of monetary policy tightening,” the report said.
This is a big change from November, when Reserve Bank Governor Michele Bullock hinted that a rate hike was still possible.
“We are closely monitoring the data and are not ruling anything out,” she said at the time.
“So the reason I say we’re not ruling anything in or out is we think there are still some risks on the upside.”
However, the minutes of the December Reserve Bank meeting continued to express concerns about high inflation, despite signaling for the first time that the next step was likely to be austerity.
“In weighing the possible implications of these observations for future decisions on the stance of monetary policy, members reiterated their previous position that they had a minimum tolerance to accommodate a longer period of high inflation than currently envisaged.” , the report said.
The Reserve Bank has given a strong hint that rate cuts are on the way, even though inflation is still too high (Sydney shoppers are pictured)
Although headline inflation is at a three-year low of 2.8 per cent, the RBA saw this as a product of temporary $300 electricity rebates and cheaper petrol prices.
Underlying inflation excluding one-off factors, known as the trimmed average, was higher at 3.5 percent in the year to September, putting it at a level above the Reserve Bank’s target of 2 to 3 percent.
The RBA noted that other countries – including the US and the UK – have cut interest rates this year, while they have not.
But the minutes suggested that rate cuts are unlikely to be so deep abroad, after the US Federal Reserve panicked financial markets last week by hinting that fewer rate cuts were likely in 2025 than expected.
“Despite the cuts overseas, the combination of market prices and central bank estimates of neutral interest rates implied that monetary policy in several economies could be more contractionary than in Australia, and would remain so in 2025,” according to the minutes.
The Reserve Bank of Australia’s cash rate of 4.35 percent is now 110 basis points higher than Canada’s equivalent policy rate of 3.25 percent, after four rate cuts in 2024.
New Zealand also has a lower cash rate of 4.25 percent, after three rate cuts this year that have failed to stem a recession.
In Australia’s case, the RBA’s rate hikes in 2022 and 2023 have not yet caused a technical recession, but the economic growth rate of just 0.8 percent in the year to September was the weakest since the 1991 recession.
Nevertheless, Australia’s cash rate of 4.35 percent is still marginally lower than the US Fed’s equivalent 4.25 to 4.5 percent level and the Bank of England’s 4.75 percent.
This is a big change from November, when Reserve Bank Governor Michele Bullock hinted that a rate hike was still possible