"The RBA will be later than its peers to rate cuts," economist says
The Reserve Bank of Australia is not expected to rush in following the US Federal Reserve's anticipated interest rate cuts this year, according to a Westpac analysis.
Instead, the RBA could potentially start its own rate cutting cycle in September, The Australian reported. This approach is based on Australia's domestic needs and the nation's slower progress in lowering inflation compared to its peers.
“Australia has been later to the inflation surge and disinflation than peer economies, so the RBA will be later than its peers to cut rates,” Westpac chief economist Luci Ellis (pictured above) told The Australian. “Central banks can move policy according to domestic needs rather than be led by the Fed. Exchange rates are likely to respond.”
The RBA has the flexibility to move policy according to domestic needs rather than being solely led by the actions of the Federal Reserve.
Factors influencing RBA's monetary policy
The RBA's monetary policy adjustments are expected to be based on Australia's domestic needs, barring any global shocks that might trigger coordinated policy stimuli worldwide, The Australian reported.
The RBA will consider factors such as inflation levels and the Australian dollar's response to changes in interest rates.
Expectations of interest rate cuts
Expectations of RBA interest rate cuts have been pushed out significantly in recent weeks. Overnight index swaps indicate that the first two rate cuts in Australia are now expected in November 2024 and March 2025, according to The Australian.
Previously, rate cut pricing was more aggressive, with the market briefly pricing in an initial 25 basis points rate cut by June. However, most economists now doubt that there will be enough disinflation in Australia for rate cuts to begin until well into the second half of the year.
Read next: RBA rate moves “slaying the inflation dragon” – REIA
Despite this, most economists believe that rates have peaked, and the RBA is expected to start cutting rates in November.
RBA's timing and independence
Ellis said that the RBA can operate on its own timetable due to the floating exchange rate regime in Australia. The exchange rate adjusts to absorb shifts in investment flows attracted by changing relative yields.
While global factors can have a common influence on the actions of all monetary policymakers, as seen during the pandemic, central banks can respond to the domestic implications of those common factors rather than the responses of larger counterparts, The Australian reported. Ellis believed that there wouldn't be any barriers to the RBA operating on its own view of the domestic inflation outlook.
Outlook for interest and exchange rates
The outlook for both interest and exchange rates will always evolve with events, including geopolitical events, headwinds to growth in China, and short-term movements influenced by risk sentiment.
In Australia's case, the outlook for key commodity prices also tends to shape the outlook for the exchange rate, The Australian reported. Westpac's view is that the Australian dollar will appreciate over 2024, underpinned by expectations of a relatively slower pace of rate cuts in Australia.
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