RBA interest rate cuts dashed on US inflation, next move may be up

Locally, a delay in potential rate reductions makes it increasingly unlikely the Albanese government will call an early election, as it hopes for multiple RBA rate cuts before going to the polls by May 2025.

JBWere chief investment officer Sally Auld said the sticky US inflation reinforced her call that the “RBA won’t be cutting rates any time soon”.

“The RBA would be watching this with a great deal of interest, especially because some of that stickiness in US inflation has been in services, which has been the bug bear for the bank,” she said.

“The more interesting question is, what if central banks have to resume tightening cycles – which nobody is really prepared for.”

Ms Auld said the outlook for the Australian economy appeared to be better for the second half of the year, due to rising house prices, income tax cuts from July and wage increases.

“The RBA is staring down the barrel of house prices lifting again, stage three tax cuts and real wages going up.”

The US dollar leapt to a five-month top against a basket of major currencies, sending the Australian dollar tumbling 1.8 per cent to US65.09¢, its biggest daily drop since August.

Oil and petrol prices higher

The price of the global oil benchmark, brent crude, bounced above $US90 a barrel and local petrol prices are above $2.30 a litre in capital cities.

Speaking from Washington, former RBA board member Warwick McKibbin said neither the Fed nor the RBA could cut interest rates this year.

“We could see further tightening in Australia as a result of real interest rates not being tight enough with these inflation dynamics,” Professor McKibbin said.

“There is also tax cuts coming through on July 1st, which is worth about 25 basis points [of RBA rate changes], plus the government’s stimulus package that was announced today following the US Inflation Reduction Act.

“That’s a really dangerous policy.”

New and existing subsidies and incentives designed to bolster domestic manufacturing and the green energy transition will be brought under the umbrella of a “Future Made in Australia Act”, Prime Minister Anthony Albanese announced, as the government seeks to boost its economic and national security credentials.

Mr Albanese said on Thursday it was about encouraging private sector investment and “would not contribute to inflation”.

“I assure you that when the measures we are considering in the budget come forward to our expenditure committee review process, then Jim Chalmers and Katy Gallagher wield a big stick, making sure that what we are doing is fiscally responsible,” he said.

Protectionist green policies colliding with tax cuts

Professor McKibbin said Australia was going backwards to protectionist low-productivity manufacturing policies of the 1900s that were only undone by big tariff reductions and Hawke-Keating Labor economic reforms in the 1980s.

“We’re crazy to do what the US and everyone else is doing in stimulating the same sectors.

”As the IMF said yesterday, small open economies like Australia benefit from application of the technology, not developing them.”

“History shows there are more cases where industrial policy is a bad idea, than a good idea.”

Instead of “picking winners”, the government should remove blockages to investment by improving the tax system, international trade and industrial relations, not the extra workplace regulations Labor had imposed, he said.

Professor McKibbin said taxpayers would be at risk from a new round of rent seeking by renewable energy companies, and people seeking subsidies should have to declare their self-interest.

“Self interest is going to damage the future of the Australian economy,” he said.

Australia’s lower cash rate of 4.35 per cent is only about 1 percentage point above the 3.4 monthly inflation rate, historically less than what has been required to reduce inflation to the 2-3 per cent target.

The Fed funds rate of 5.25 to 5.5 per cent is higher in real (inflation adjusted) terms, so a US rate increase was unlikely, Professor McKibbin said.

Fed made a mistake by signalling rate cuts

Professor McKibbin said the US Fed had made a mistake by previously flagging potential rate cuts too soon, which had stoked financial market expectations and effectively gave “a lot of financial stimulus into the economy”.

“The key learning there is central banks shouldn’t tell the market they’re going to do something when you don’t know, because the market will believe it.”

Early this year, Fed policymakers were signalling up to six rate cuts could flow this year.

RBA governor Michele Bullock has offered less forward guidance, saying last month that the next move in interest rates could be up or down, depending on how inflation and the labour market perform.

The jobless rate surprisingly plunged to 3.7 per cent in February and the RBA will be closely watching the unemployment figures for March when they are reported next Thursday.

JBWere’s Ms Auld said markets were learning a history lesson that to slay the last bit of inflation, the economy would likely have to slow further and unemployment rise more than hoped.

Sticky US inflation showed the final leg of disinflation in services would be much harder than the initial decline in goods inflation since supply chains had reopened after the pandemic, she said.

Bond market futures on Thursday were pricing a 91 per cent chance of an RBA easing in December. On Wednesday, they were fully priced for a move in November, but now imply just 22 basis points of cuts in 2024, from 31 basis points previously.

The warnings are consistent with JPMorgan chief executive Jamie Dimon’s message to The Australian Financial Review Banking Summit on March 26.

Mr Dimon said the US Federal Reserve should wait until after the market’s expectation of June for potential interest rate cuts because the US economy was “booming” as evidenced by consumers spending, share prices soaring, home prices rising and “plentiful” jobs.

“Their credibility is a little bit at stake here … Unemployment is still very low … So I would be a little patient if I were them,” Mr Dimon said in March.