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July rate cut will be a close call decision
Economists from the big four banks have all predicted the RBA to deliver another rate cut during its July meeting; however, some admit the decision will be a close call.
Off the back of easing inflationary pressures, soft gross domestic product (GDP) growth, and consistently lateral unemployment levels, economists from Australia’s major banks are expecting the Reserve Bank of Australia (RBA) to once again reduce the official cash rate by 0.25 bps, bringing it down to 3.60 per cent.
A cut during the upcoming July monetary policy meeting would bring the official cash rate down to its lowest level since March 2023 and would mark the first time the RBA delivered two consecutive rate cuts since the onset of the COVID-19 pandemic in March 2020.
Of the major banks, NAB has most consistently held the view that the RBA will deliver a July rate cut, updating its forecast in early April this year, roughly a week after US President Donald Trump’s so-called “Liberation Day” tariff announcement shook markets and economic commentators.
NAB’s chief economist Dr Sally Auld said at the time that headwinds from the global environment have intensified, however, noted that “error bounds around [their] forecast are large given uncertainty remains exceptionally elevated”.
“Once the cash rate reaches a level more consistent with a neutral policy setting, we then expect the RBA to pause for a few months before taking the cash rate into modestly accommodative territory,” Auld said.
ANZ, shifting its rate call from August to July mere days before the board’s meeting, cited stalled consumer confidence and uncertainty around US trade policy.
According to the major bank’s head of Australian economics, Adam Boyton, the RBA may view a July cut as “the path of least regret”, opting not to wait for the full forecast update and August Statement on Monetary Policy (SMP), as it has done following previous decisions.
Recent data has shown Australia’s labour market holding steady at around 4.1 per cent for nearly a year – a stronger-than-expected outcome compared to the RBA’s assumptions in the May SMP.
Meanwhile, the central bank’s trimmed mean inflation forecast for the June quarter, set between 0.5 and 0.6 per cent, is unlikely to surprise on the downside, Boyton noted.
Despite a 75 bp reduction over a short period (May to July and potentially August) – which carries the risk of spurring “a little more demand than might be desirable” – Boyton suggested that recent softness in retail trade indicates this risk is less pressing, making it more likely policymakers will act now rather than wait for consumer demand to pick up.
However, similar to Westpac chief economist Luci Ellis’ assessment that a July cut isn’t “a shoo-in”, Boyton stated that the July meeting will be “a much closer call than market pricing would suggest”.
Indeed, Ellis noted RBA governor Michele Bullock’s caution towards the monthly CPI indicator back in May – particularly its month-to-month volatility – while stating that a single month’s data usually “wouldn’t – and shouldn’t” determine the central bank’s decision making.
Ellis added that Bullock’s comments were “an explicit steer that the RBA’s thinking in May was that it did not plan to do back-to-back cuts but would wait for the quarterly CPI ahead of its August meeting”.
“And they still might do that, but it is harder to justify now,” Ellis added.
Commonwealth Bank of Australia’s (CBA) senior economist Belinda Allen confirmed the major bank shifted its rate cut call to July following a combination of “a dovish May RBA decision” and recent economic data flows.
Much like her contemporaries in ANZ and Westpac, Allen noted the decision to cut in July “will still be a close one” and expects the RBA to discuss both a hold and a cut during the meeting.
“The case to leave the cash rate on hold would be around diminished trade uncertainty since the heightened May environment, a still tight labour market and wanting to see a full quarterly CPI print,” Allen said. “We expect though a 25 basis point cut will make the stronger argument.”
HSBC’s chief economist Paul Bloxham also highlighted the RBA altering “the tone of its rhetoric” and the board’s willingness and ability to cut the cash rate should inflation continue to ease.
“In addition, the GDP figures which were published in early June surprised to the downside, which, on their face, should encourage the RBA to consider cutting,” Bloxham said. “That said, the weakness in the figures was mostly due to a fall in public demand, with a modest upswing in private sector activity still appearing to be underway.”
Bloxham added that weak GDP figures wouldn’t necessarily be sufficient to force the RBA’s hand towards a reduction; however, with the addition of weaker monthly CPI figures, it should support the case to cut.
AUTHOR
Adrian Suljanovic
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