Australia’s central bank is poised to cut interest rates for the first time in four years, balancing economic slowdown against inflationary risks fueled by global trade disruptions and looming election-driven spending.
A survey of economists and traders suggests the Reserve Bank of Australia (RBA) will likely reduce the cash rate by 25 basis points to 4.1% on Tuesday, marking its first cut since November 2020.
The move could offer a timely boost for Prime Minister Anthony Albanese, whose reelection prospects are under pressure.
Markets are pricing in an 85% chance of easing, yet factors such as consumer spending gains and evolving U.S. trade policies may push policymakers to tread cautiously.
Unlike its global counterparts, the RBA refrained from ultra-aggressive tightening in 2022-2023, seeking to protect job growth while reining in inflation—a balancing act that has drawn both praise and skepticism.
The Case for a Cut
Inflation has eased faster than anticipated, a trend expected to be reflected in the RBA’s latest economic projections. Meanwhile, economic activity has slowed sharply since 2023.
If I were still at the RBA, I would struggle to justify holding rates given the inflation trajectory and the revisions expected in the new forecast, said Luci Ellis, chief economist at Westpac Banking Corp. and former RBA assistant governor.
However, she cautioned that this is not the start of a deep cutting cycle, estimating a total reduction of at most 100 basis points.
Cooling pressures in rents, new home costs, and insurance suggest inflation’s grip is loosening.
Consumer inflation expectations have retreated to pre-pandemic levels, while business capacity utilization is easing—indicators that typically support monetary easing.
The Case for Holding Steady
Yet, compelling arguments remain for keeping rates on hold. A recent rise in consumer spending, driven by tax cuts and government subsidies, has strengthened household disposable income and lifted consumption.
Westpac’s Ellis and Commonwealth Bank of Australia’s Gareth Aird assign a 20% probability to the RBA staying put, keeping rates at a 13-year high of 4.35%.
The Australian dollar’s 5% decline since November has also made imports more expensive, adding inflationary pressure.
Market Sentiment and Policy Outlook
Bloomberg Economics warns that markets may be underestimating the risk of a pause. A resilient labor market, strong consumer demand, robust credit growth, and a weakening currency could convince the RBA to delay its policy shift.
Unemployment remains low, with job vacancies still elevated, signaling potential wage pressures.
Government wage data due Wednesday and employment figures released Thursday will offer further clarity.
Meanwhile, RBA Governor Michele Bullock is set to testify before a parliamentary committee on Friday, providing fresh insights into the central bank’s thinking.
With an election approaching and government spending surging, policymakers must weigh the risk of fueling inflation against the need for economic relief.
“Markets are overly confident in a rate cut,” said Sean Keane, chief Asia-Pacific strategist at JB Drax Honore.
“The case for easing may strengthen later this year, but for now, the Australian economy isn’t flashing red, and there’s no urgency to act.”
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