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The Reserve Bank of Australia (RBA) is scheduled to meet on Tuesday to decide whether to lower the cash rate target from 4.1 percent.
Although inflation has been decreasing, the RBA might be cautious about reducing rates too soon, as an economist suggests it could “unleash animal spirits”.
At its initial meeting of the year in February, it had already lowered the target from 4.35 percent, but .
The RBA has multiple factors to evaluate before making its decision.
Which data is worth paying attention to?
The Australian Bureau of Statistics released data on the wage price index and labour force growth this past week, but experts have told SBS the data will not significantly impact RBA decision-making.
Sally Tindall, data insights director at financial comparison site Canstar, said the RBA would be looking at several factors to make its decision on Tuesday, chiefly inflation and global uncertainty.
“There will be lots of data, it [the RBA] looks at like recent wage data and labour force growth. It’s all a real melting pot of information,” she told SBS News.
“But inflation is always at the forefront for the Reserve Bank and weighing that up with risk factors like the global economy.”
The RBA aims to keep inflation between 2 to 3 per cent.
The latest data from the March quarter showed trimmed mean inflation at 2.9 percent, indicating the possibility that the Reserve Bank may cut the cash rate target on Tuesday.
Inflation within RBA target
RSM Australia economist Devika Shivadeka said trimmed mean inflation, which doesn’t take into account temporary price changes, is “particularly important”.
“Trimmed mean strips out the noise that comes with temporary subsidies and shows that inflation is organically coming down,” she told SBS News.
“They would be aware of other data and other risk, for instance at the last meeting the RBA spoke about subdued growth as a reason to not make a cut.”
Shivadeka also noted that the Consumer Price Index was also in a good place at 2.4 per cent, again within the RBA target range.
Betashares chief economist David Bassanese said a steady unemployment rate was also a sign of a healthy economy.
“We are seeing a solid unemployment number of 4.1 per cent, we are getting strong employment growth but we’re also getting strong labour supply.”
But Bassanese said the RBA could remain cautious, and keep rates on hold as it did at its last meeting in March.
Source: SBS News
‘Unleash animal spirits’
He said that since trimmed mean inflation is only within target by 0.1 per cent, the RBA could be reluctant to “unleash animal spirits”, or potentially invoke too much optimism about the health of the economy.
“Inflation is just within the band. So they may feel the economy doesn’t need a rate cut, and that cutting rates now might slow the hope for a continued rate of declining inflation,” he said.
“We may see a strong rebound in house prices, a strong rebound in consumer spending, and maybe frustrate what has been an encouraging downtrend in inflation.”
Beyond maintaining the downward trend of inflation, another consideration for the RBA is the influence of global risks on setting the cash rate.
Global risks
Bassanese said market concerns around US President Donald Trump’s tariffs have died down, but still present a “major risk” in the next six to 12 months.
Global stock markets surged on Monday after the for at least 90 days.
“I think tariff uncertainty would still be weighing on the RBAs’ thinking at the moment,” he said.
“I think the increase in global risks as a result of Trump has certainly not been removed and is certainly higher than it was a few months ago.”
Shivadeka said the knock-on effect of Trump’s policies is important to pay attention to.
“It’s not just what Trump does, but it’s also how other countries react to what he does,” she said.
“With all these on-again, off-again tariffs, the RBA could want to wait and see.”
Banks and economists predict a rate cut
However, she said domestically, Australia was in a strong position to see a rate cut.
“As long as Australia is not directly in the global firing line, I think we would be comfortable moving based on what is happening domestically, while keeping a very keen eye on what’s happening globally,” she said.
Source: SBS News
Shivadeka and Bassanese both predicted the RBA would reduce the cash rate target by 0.25 percentage points to 3.85 per cent.
“Trump has sort of backtracked a little on the tariffs. They still pose risks, but maybe not as great a risk that we previously had thought,” Bassanese added.
Commonwealth Bank, Westpac and ANZ are all predicting the RBA will reduce the cash rate target by 0.25 percentage points. NAB is forecasting a double cut, which would result in a drop of 0.5 percentage points.
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