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Bank of America (BofA) analysts projected that the Reserve Bank of Australia (RBA) would lower its cash rate target by 25 basis points from 4.35% to 4.1% at its upcoming February meeting. This move aligns with consensus and market expectations.
The RBA’s statement and subsequent press conference are anticipated to indicate a measured approach to monetary easing. BofA also noted that there is a possibility the RBA might not adjust rates in February.
The decision to cut rates is supported by recent economic data. Fourth-quarter inflation figures were softer than anticipated, with the RBA’s preferred measure, trimmed mean inflation, decreasing from 3.5% to 3.2%, which is 20 basis points below the RBA’s forecast. Despite this, BofA does not foresee the RBA signaling further rate cuts in April.
BofA’s analysts suggest that the RBA will opt for a gradual easing cycle, influenced by a tighter-than-expected labor market. Current unemployment rates are unusually low for the onset of an easing cycle, excluding the period during the Global Financial Crisis.
Although the labor market is expected to weaken by 2025, recent data, including a decline in youth unemployment, indicates this will happen slowly. The resilience of the labor market is likely to lead to a gradual easing cycle.
Additionally, downside risks to consumption, which were a concern highlighted in the RBA’s November Statement on Monetary Policy, seem to be diminishing. Fourth-quarter retail sales volumes exceeded expectations, marking the highest quarterly growth since the first quarter of 2022.
The Australian Bureau of Statistics’ household spending indicator also showed stronger results than predicted. These indicators suggest that the consumer response to tax cuts is materializing, albeit later than the RBA had expected.
Timing and optics are also factors contributing to the likelihood of a February rate cut. The upcoming meeting will be the last under the current Board structure before the introduction of a new Monetary Policy Board in March, which will include two external appointments by the Treasurer.
With the Federal election campaign likely to coincide with the 31 March – 1 April meeting, a rate cut in April, following a hold in February, could be perceived as politically motivated if it occurs after the new Board appointments.
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