Luci Ellis, Westpac’s group chief economist, says there’s no need to wait for next week’s release of the March quarter inflation figures before we know what the Reserve Bank will do to interest rates at its May meeting:
“Lock it in, no need to wait for the CPI: RBA Monetary Policy Board expected to cut by 25 basis points at its 20 May meeting.”
That’s the intro in her latest note.
Ms Ellis says the turmoil abroad has changed the game. She says the RBA will cut rates in May even if the March inflation data are “a shade disappointing.”
“Uncertainty has escalated to a whole new level and the risks have completely flipped,” she says.
“Even though we do not expect the US administration to implement tariffs at the rates originally announced, some damage has already been done.
“Global growth – and especially US growth – will be slower; the response of China will be disinflationary for the world outside the US; and uncertainty is likely to delay decisions on some investment projects.
“For this reason, we lock in our view that the Board will cut the cash rate by 25bps to 3.85% on 20 May.
“Holding rates steady in the face of the global turmoil and softer momentum in the labour market – for the sake of 0.2ppts on inflation – would be very hard to explain.
“For the time being, we continue to expect a total of three further cuts (75bps in total), including the cut in May, with August and November pencilled in for the other two cuts.
“However, the risks on timing and extent are now skewed to the RBA moving faster than this and / or going further.
“We do not regard an inter-meeting cut or a 50 basis points cut as plausible, contrary to some of the more breathless commentary.
“As we have been highlighting for some time, Australia is relatively less affected by US tariffs than some economies, and the hit to domestic growth is expected to be moderate.
“While the risks have clearly shifted to the dovish side, we do not expect the RBA’s thinking to pivot directly from cutting reluctantly if at all, to going hard in May and signalling more. To do so would look panicky and is contrary to the limited RBA communication since the ‘Liberation Day’ tariff announcements, which was much more circumspect,” she says.
And for everyone who has endured constant eye-twitches from the moment the RBA began to move rates in ways that didn’t match the traditional quarter-point levels of the cash rate, Ms Ellis has held out a promising idea.
Remember how, during the pandemic in November 2020, the RBA cut the cash rate from 0.25% to 0.1%?
When it raised interest rates from that record low level, in May 2022, it raised them by 25 basis points to 0.35%, which was an unusual number, but it has stuck with that unusual sequence ever since, lifting them to 0.85%, then to 1.35%, then to 1.85%, then to 2.35% and so on.
For the love of God, why can’t we shift back to the quarter-point neatness of yesteryear!
Well, Ms Ellis says the RBA Board’s meeting in May may be the opportune time for the RBA to fix that practice.
“If the Board were to do something other than cut by 25 basis points in May, it might consider a 35 basis points move to 3.75%, and round quarter-point levels of the cash rate.
“To be clear, we regard this as a very outside chance. The RBA has long emphasised that quarter-point neatness is not a consideration for policy. (It was, after all, me in my old job who would theatrically exclaim ‘we don’t care!’ whenever I was asked about getting the cash rate back to round quarter points. Nowadays I just change the pronoun and exclaim ‘they don’t care!’.)
“But there is one slight niggle to that understanding: the RBA is implementing a revised ‘ample reserves’ model for monetary policy implementation, and from May will no longer announce the exchange settlement funds rate as part of its policy announcements.
“So, if they were ever going to move back to a cash rate level at round quarter-points, the upcoming meeting is a good time to do it.
“Again, though, this is a very outside chance. Lock in the 25bp move in May, and be ready to pivot thereafter should the overseas news worsen,” she says.
Here’s hoping…
