Steve Campbell: Rate cuts unlikely before November

What does the latest commentary from the RBA signal for markets? Pendal’s head of cash strategies STEVE CAMPBELL explains

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IT WAS no surprise that the Reserve Bank of Australia left the cash rate unchanged at 4.35% this week.

Though the RBA’s statement was more neutral than February, which prompted a rally in bond yields.

What did we learn from the statement?

What is certain is that there is a lot of uncertainty at the RBA at the moment. In fact “uncertainty” appeared six times in the statement in relation to:

• Economic outlook
• Sustained productivity growth
• Chinese economy and implications of the conflicts in the Middle East and Ukraine
• Lags from past monetary policy tightening
• Household consumption
• The path of interest rates that best ensures inflation returns to target in a reasonable timeframe.

The unemployment rate has risen to 4.1% (following a low of 3.4% in late 2022 and 3.5% in mid-2023).

But the labour market is still seen as too tight to produce inflation outcomes the RBA wants to see.

Productivity gains is the key here. Productivity growth needs to increase to its long-run average for wages growth to be consistent with the inflation target.

The RBA sees signs that productivity has picked up in the past two quarters which resulted in a slight moderation in unit labour costs. Further gains, though, remain uncertain.

Household consumption has been weak over the past three quarters, weighed down by falling real income growth and higher interest rates.

The RBA anticipates some reversal here though, with real incomes expected to increase and support economic growth through the remainder of the year.

The Stage 3 tax cuts will also support consumption.

Inflation is falling in line with the RBA’s expectations and is expected to be within the 2-3% target range in 2025 and at the midpoint in 2026.

Inflation within the target range is not a prerequisite for the RBA to ease policy – if inflation is falling sustainably, then the central bank can ease monetary policy despite inflation being above 3%.

Services inflation though remains elevated and is moderating only gradually – something that is also occurring in other economies.

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Where to from here?

In our view, any change from the RBA is more likely to occur at those meetings where its latest set of economic forecasts are released via the Statement on Monetary Policy (SoMP).

The SoMP is released quarterly, with the next set of forecasts due to be released at the next meeting in May.

The forecasts, and changes to prior forecasts, can be used as a justification by the RBA should it look to change the tone of its statement or change monetary policy settings.

However, any change to the cash rate is not going to happen in the nearer term.

November is more likely than August for any policy easing at this stage, in our view.

About Steve Campbell and Pendal’s Income and Fixed Interest team

Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.

Find out more about  Pendal’s cash funds:

Short Term Income Securities Fund
Pendal Stable Cash Plus Fund

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here