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Hedge Clippings | 21 February 2025
This week's rate cut will forever show the market consensus was correct, however all the comments coming from the RBA, both in their official post meeting media release, and in interviews and comments since, suggest it was a close run thing. As Deputy Governor Andrew Hauser said on Bloomberg TV, while there was a clear-cut consensus among the board members, the decision was by no means clear-cut, and neither was the decision.
While there was plenty of reasoning given in the RBA's media statement, it could easily be boiled down to the three paragraph headings it contained: Underlying inflation is moderating; The outlook remains uncertain, and Sustainably returning inflation to target is the priority.
Hauser's comments were as usual clear, and well delivered. To summarise, more data is required, and as the RBA focuses on quarterly rather than monthly inflation numbers, don't expect a further cut on April 1 following the board's next meeting.
Hauser noted that he doesn't have the confidence that the market's consensus (for further multiple cuts) is correct, noting that "global uncertainty" (shorthand we assume for whatever Trump may do next) may impact the local economy, and therefore the board's rate cut may have helped reduce some resulting consumer uncertainty.
It is worth noting however, as pointed out by PinPoint Analytics' Michael Blythe, what historically happens following the start of the easing cycle - assuming there are follow-on cuts eventually, as there have been over the past six easing cycles:
- Once a rate-cut cycle is under way, most of the action occurs in the first 12 months.
- The "typical" reduction in the cash rate during Year 1 sits in a 1-2% range.
PinPoint's analysis goes on to show that during the first year of an easing cycle, and as cuts work their way through the economy, the following typically occur:
- GDP growth typically accelerates, driven by the consumer and residential construction;
- but unemployment rises for a while;
- rate cuts are rarely followed by spikes in consumer or business confidence;
- inflation rates lift - but the acceleration in the more recent easing cycles is quite modest;
- house price growth accelerates;
- more often than not, share prices, 10-year bond yields and the AUD fall.
Full details and Pinpoint's Chart pack can be accessed here.
While there's plenty of historical data to rely on when trying to predict the future of the economy, doing so accurately is fraught with danger - or at least mistakes. If that's the case with economics, what hope does anyone have of being able to guess the next iteration of whatever policy decision, claim or social media post coming from Donald Trump will have?
Trump's claim this week that Ukraine started the war with Russia, or that Zelensky is a dictator with only a 4% approval rating (actually 57%) is, to say the least, bizarre. However, that probably sums up Hauser's reference to "global uncertainty".
With allies like that, who needs enemies?
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