Australia’s central bank faces crunch time as it resists interest rate cuts Reuters

By Wayne Cole

SYDNEY (Reuters) – Australia’s central bank will come under intense pressure to ease policy in coming weeks as government gifts to lower the cost of living drag consumer prices sharply lower, even as core inflation remains stubbornly sticky.

Data for July next week is likely to show headline inflation falling back into the Reserve Bank of Australia’s (RBA) 2-3% target range for the first time since 2021, prompting public and political calls to cut the punishing rate of payments mortgage.

With easing expected in the United States, European Union and Canada in the days ahead of the RBA’s next meeting on September 24, it would leave it almost alone among developed central banks not to cut rates.

Desperate to head off the tumult, policymakers have waged an extended campaign of distaste, saying explicitly that the board is unlikely to cut rates in the near term given the risks of rising inflation.

This kind of conditional forward guidance was considered taboo at the bank, given that it was something similar that cost former RBA chief Philip Lowe his job, who in 2021 said borrower rates were unlikely to rise until 2024.

“It’s hard to remember a time with such a plethora of RBA communication in such a short period of time,” said Gareth Aird, head of Australian economics at the Commonwealth Bank of Australia (OTC:) (CBA).

“If near-term economic data develops in line with the RBA’s latest forecast, the cash rate will be left on hold until the first quarter of 2025,” he added. “But we continue to be on the pricing side of the market and think we will more likely than not see a rate cut by the end of the year.”

Despite the RBA’s protestations not to cut, markets imply a 42% chance it will cut the 4.35% cash rate by a quarter of a point in September. That probability rises to 84% for the RBA’s November meeting, which will be approaching on the back of third-quarter inflation data.

CPI COULD CAUSE RBA MESSAGE

CBA’s Aird expects third-quarter core inflation, or the stripped-down average, to slow to 3.3% from 3.9% in the second quarter, while unemployment will rise from the current 4.2% and will warrant a discount.

The biggest challenge to the RBA’s messaging is that the Consumer Price Index (CPI) is certain to fall further and is already likely to be back in the central bank’s 2-3% target range.

This is largely the creation of the Labor government, which is offering A$3.5 billion ($2.36 billion) in rebates to all households and grants to some renters.

Andrew Boak, an economist at Goldman Sachs, estimates that this will cause the CPI to fall sharply by 0.7% in July alone and lower annual inflation by a full percentage point to 2.7%.

July’s CPI data is due on August 28 and is sure to generate media headlines calling for immediate relief for borrowers in a country where most mortgages are variable and rise or fall with every rate change.

RBA Governor Michele Bullock argued that the public would understand that core inflation was what mattered and the bank was setting policy “for the long game”.

However, the RBA’s 425 basis points of tightening from mid-2022 added $1,000 or more to average monthly mortgage repayments and caused widespread financial stress. Surveys show that consumer sentiment is at an all-time low, usually seen only during recessions.

Voters notified their MPs, and Bullock drew pointed questions in a parliamentary appearance this month.

The global tide is also working against the RBA’s reluctance to ease. Neighboring New Zealand cut tariffs last week. The Federal Reserve and the Bank of Canada are thought to be certain to cut on September 18, and the European Central Bank the following day. Fares in the latter two will also be below those in Australia.

All this should make the RBA board meeting on 24 September a busy affair.

($1 = 1.4826 Australian dollars)