RBA poised for ‘hawkish cut’ as US-China reprieve boosts outlook

[SYDNEY] 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.

Economists and money markets expect the Reserve Bank of Australia (RBA) will announce a quarter percentage-point cut on Tuesday (May 20) to bring its cash rate to a two-year low of 3.85 per cent. They reckon governor Michele Bullock will be reluctant to suggest further easing to come when she appears before journalists at 3.30 pm Sydney time, an hour after the rate decision is released.

“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. He was referring to recent stronger-than-expected price and labour data and a 90-day trade truce between the US and China.

Since the RBA’s Mar 31 to Apr 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.

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 does not publish a dot plot or predict a rate a path, instead using market pricing as a reference for its economic outlook.

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

The RBA has a narrower scope for easing after it opted not to hike as much as its global peers during the post-Covid-19 tightening cycle. Having taken longer to restrain inflation, Australia’s monetary policy is ironically now more restrictive than New Zealand’s and Canada’s and broadly on a par with the US and UK given they all cut at a faster pace.

The RBA aimed to hold onto labour 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 to 3 per cent target last quarter for the first time in more than three years and unemployment hovering around a very low 4 per cent.

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’s Josh Williamson sees “a credible scenario” where the RBA decides to leave rates unchanged at 4.1 per cent on Tuesday and former board member Warwick McKibbin insists it should.

Australia’s productivity growth remains anaemic, while uncertainties remain about the impact of a tight labour market on firms’ wage and price-setting behaviour. 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.

Economists have urged the government to implement reforms to boost productivity including overhauling a Byzantine tax system and accelerating Australia’s green energy transition. However, it’s still unclear if the newly re-elected government of Prime Minister Anthony Albanese will push through tough measures to spur the economy.

Albanese’s victory speech earlier this month focused on the government’s care agenda that has been a key driver of hiring.

“The increase in employees is not translating into higher productivity,” Citi’s Williamson said, adding that the board could leave rates unchanged and reiterate that “the door remains open to possible further rate cuts” if inflation continues to moderate. BLOOMBERG