RBA tipped to embrace ‘lower for longer’ strategy

In its monetary policy update, major bank NAB has confirmed that it expects the Reserve Bank of Australia (RBA) to remain on hold for a longer period of time as NAB has pushed back its first rate cut call to May 2025.

From that point, NAB has forecast one rate cut per quarter to leave the cash rate at 3.10 per cent by the midpoint of 2026.

The shift in NAB’s rate cut call comes as the monthly Consumer Price Index (CPI) indicator rose 4 per cent in the year to May 2024, an increase of 0.4 per cent on the 3.6 per cent reading in April.

NAB’s group chief economist Alan Oster said that while economic growth (particularly in GDP and the labour market) has “played out broadly” to the bank’s and RBA’s forecasts, progress on inflation is proving to be slower than expected.

“The May monthly CPI provided tentative evidence of some slowing in still too hot market services components that suggest domestic inflation pressures are past their peak,” Oster said.

“However, housing components remain a persistent source of strength, and there has been little further disinflation impulse from goods and food prices.”

Oster further said the RBA’s strategy to take rates to a lower level when compared to the more restrictive levels seen in other advanced economics has been driven by an “understandable desire to limit the risk of a significant labour market deterioration”.

“However, the quid-pro-quo of this approach has always been that rates may need to remain restrictive for longer to bring inflation back to target,” Oster said.

“In effect, the board has embraced a ‘lower for longer’ approach – a lower rate peak but a longer period at that peak.

“That trade-off is now becoming clearer with inflation remaining well above target some two years on from the beginning of the RBA’s hiking cycle and rate cuts looking more distant at a time when some other central banks have already begun easing.”

One other major bank, ANZ, also shifted its rate cut call in the lead-up to the June decision, with the first rate cut being forecast for February 2025.

On the heels of the May CPI print, ANZ’s preliminary forecasts for 2Q24 CPI are 1.1 per cent qoq for headline and 0.9 per cent qoq for trimmed mean (NAB holds this same trimmed mean forecast).

As a result, annual headline inflation would be 3.9 per cent yoy and trimmed mean inflation at 4 per cent yoy in the June quarter, surpassing the RBA’s 3.8 per cent yoy forecast.

“A result like this, alongside upward revisions to the RBA’s expectations for activity and labour market data, could see the board hike at its 5–6 August meeting,” ANZ senior economist Catherine Birch said.

“That is not currently our call, but we’ll be considering all the available information in the lead-up.”

According to Birch, the RBA is expected to “look through one-off impacts” of large but temporary effects of various government cost-of-living measures, such as electricity rebates.

“The cost-of-living measures will not have a material influence on trimmed mean inflation. Rather, we have slightly upgraded our end-2024 forecast to 3.4 per cent y/y (prev: 3.2 per cent y/y),” Birch said.

“Our end-2025 forecast is marginally higher at 2.8 per cent y/y (prev: 2.7 per cent y/y). Importantly, we see the six-month annualised rate of trimmed mean inflation falling just within the RBA’s 2–3 per cent target in Q4 2024.

“With the 4Q CPI data due in late January, this opens the door for the RBA to start cutting rates in February 2025 (our base case). If there were a rate hike in August, it would not necessarily rule out a February easing, should inflation moderate as we expect.”

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