RBA will cut rates deeper than markets expect

Monetary policy in Australia is gaining more traction than in the US even though the Reserve Bank raised interest rates by less than the Federal Reserve, suggesting the easing cycle Down Under will be more aggressive than market pricing implies, Commonwealth Bank of Australia said.

The RBA hiked its cash rate by 4.25 percentage points in the current tightening cycle, compared with the Fed’s 5.25 points. Yet the average US outstanding mortgage rate has only risen 50-basis points, versus Australia’s 320, Gareth Aird, head of Australia economics at CBA, said in a research note on Friday.

“The monetary policy transmission channel via the mortgage market is much more direct in Australia,” Aird said. He expects that rate cuts will be required in the second-half of 2024 to stop unemployment rising above 4.5 per cent. It climbed to 4.1 per cent in January, the highest in two years, data showed on Thursday.

Economic growth has also slowed at a faster pace in Australia, reinforcing the policy traction of RBA moves. In addition, per capita inflation-adjusted household disposable income has contracted sharply in Australia, as has household consumption, whereas both those metrics have been on an upward trend in the US, CBA said.

Aird expects underlying inflation will reach the top of the RBA’s 2-3 per cent target in the three months through June, a year earlier than the central bank in Sydney’s mid-2025 forecast.

As a result, he reckons the RBA will be aggressive on the way down. Aird sees six rate cuts starting in September, bring the cash rate down to 2.85 per cent by June 2025. That contrasts with financial market pricing of just two cuts in the period.

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Aird’s report comes as economist Ian Harper, a member of the central bank’s policy-setting board, told the Wall Street Journal the RBA won’t wait for inflation to return to target before cutting rates, echoing similar views from governor Michele Bullock last week. BLOOMBERG