Australia Set for First Rate Cut Since 2020 as Trade Risks Mount

(Bloomberg) -- Australia’s central bank is poised to cut interest rates for the first time in four years even as the board remains alert to potential inflationary pressures from mounting global trade turmoil and risks of an election splurge at home.

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A majority of economists in a Bloomberg News survey as well traders expect the Reserve Bank to finally embark on easing on Tuesday with a 25 basis-point reduction in the cash rate to 4.1%. That would be the RBA’s first cut since November 2020 and may provide a shot in the arm for Prime Minister Anthony Albanese, who needs to overcome poor polling to secure a second term.

Money markets are pricing about 85% chance of a cut. Yet a pick up in consumer spending, aided by tax cuts and government subsidies, along with rising uncertainties about the impact of US trade policies may also convince policymakers to stay cautious.

The RBA’s level of policy restrictiveness remains broadly on par with major counterparts because it didn’t tighten as aggressively in 2022-2023. The board had sought to hold onto labor market gains while bringing inflation back to target — a delicate balance that has drawn some criticisms.

Below are the arguments for and against a rate cut on Tuesday.

Why Cut?

Price pressures are receding at a faster pace than the RBA anticipated, according to data. This is likely to be reflected in its quarterly update of macroeconomic forecasts released together with the rate decision. At the same time, the economy has slowed sharply since 2023.

“If I were still at the RBA, I’d struggle to write a board paper justifying rates on hold given how much inflation has come down, given the likely near-term trajectory and given how much the RBA is going to have to revise its forecasts in the new round,” said Luci Ellis, chief economist at Westpac Banking Corp. who was an assistant governor at the central bank.

Still, the discussion around policy easing is unlikely to be straightforward, with the RBA’s statement and Governor Michele Bullock’s press conference widely expected to tilt hawkish.

“It’s hard to know how much they’ll pivot their language,” Ellis said. “However, this is not a big cutting cycle. We really think they’ve got at most 100 basis points.”

Economists expect the RBA’s latest inflation forecasts to show downward revision to its closely-watched trimmed mean gauge.