RBA Can Move Again in May

Above: File image of Michelle Bullock. Image © RBA

The RBA left its cash rate unchanged at 4.1% and opened the door ajar to the cycle's second cut in May, according to some analysts.

The Bank said at Tuesday's policy decision that Australia's inflation risks are balanced and confirmed an ongoing caution about the inflation outlook, owing to still elevated core inflation.

Governor Bullock told the media that the RBA did not explicitly consider a rate cut today and hadn't made up its mind on a May rate cut.

Because headline inflation has fallen back into the RBA's target range, the statement's final sentence was amended from a commitment to return inflation "to target" to a commitment to maintain inflation at target "sustainably."

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It said the "Board needs to be confident that this progress will continue so that inflation returns to the midpoint of the target band on a sustainable basis".

The RBA's communication shows a cautious approach to the inflationary outlook, noting contradictory signals from the economy.

However, analysts at Westpac think that further rate cuts are coming, with the next most likely in May, "when the RBA should be able to point to yet another pleasant surprise on inflation."

Westpac thinks Australia's inflation rate looks to be settling closer to (or even below) the 2.5% midpoint of the RBA’s target range, allowing the RBA more room to reduce the restrictiveness of policy and even approach something like 'neutral'.

This is the interest rate at which central bank policy becomes neither restrictive (as it is now) nor expansive.

"Our forecast is for the RBA to deliver its next cut in May following Q1 CPI data, with a follow-up cut in August," says TD Bank in a post-decision assessment. "The RBA struck a more neutral tone today and is suggesting that it could react quickly with monetary policy if need be."

Like nearly all other peer central banks, the RBA will, by the time of the May decision, have more information on U.S. tariffs and will have ingested the relevant implications for Australian trade and financial markets.

Regarding tariffs, the RBA said, "monetary policy is well placed to respond to international developments if they were to have material implications for Australian activity and inflation".

However, economists at ANZ, point out that inflationary pressures are rising globally, and this is something Australia might not avoid.

Given this, "we continue to expect a shallow easing cycle, with just one more cut, most likely in August," says Adam Boyton, Head of Australian Economics at ANZ.

This is a more 'hawkish' assessment of the outlook that, if delivered, would be supportive of Australian bond yields and the Aussie Dollar.

"The RBA may wait to ease, particularly if they view the labour market as remaining resilient," says Boyton.

The RBA's statement noted labour market conditions as "tight" "despite a decline in employment in February", which implies it sees wage pressures staying elevated.

Although it acknowledged "wage pressures have eased a little more than expected... productivity growth has not picked up and growth in unit labour costs remains high."

Dr. Win Thin, Global Head of Markets Strategy at Brown Brothers Harriman, says the RBA signalled "it’s in no hurry to resume easing".

Indeed, the market scaled back odds of a 25 bp cut at the next meeting due on May 20 to 70% from 80% prior to the rate announcement.