Six questions for the RBA

Reading time: 5 minutes

What you want to know from the Bank

In last week’s Brief (What will the RBA do?), we explored the psychology of the RBA (and central banks in general) and the hesitancy of the RBA to hike rates aggressively in the face of high rates of inflation. This week, we pose six key questions on monetary policy that the public wants answered.

But the RBA has eschewed forward guidance. Therefore, we will step in to provide the answers.

Do you anticipate any further rate hikes this cycle? If so, when and why?

We can sit on the current cash rate if underlying inflation remains at an annual rate of around 3.6% and inflation expectations remain anchored. As long as the underlying inflation rate doesn’t climb any higher, we can afford to wait it out until around February or March next year. By then, there should be signs of inflation coming down and the market starting to accept that there are no more rate hikes to come. If underlying inflation isn’t coming down, or if at any point it starts to climb again, another rate hike will be required.

When can we expect a rate cut, and what will be the main catalyst? How high would unemployment have to go to prompt a rate cut?

We expect it won’t be until 2027H2 before easing can begin. The main catalyst will be a fall in inflation to the top of the target band of 3%. The unemployment rate can’t be thought of independently of inflation. But if inflation was on a sustainable downward trajectory, cuts could come sooner if the unemployment rate moved above 5%.

Could there be a rate cut if underlying inflation is still above 3%?

Yes. As long as inflation was still forecast to head towards the mid-point of the target band over the next year, rate cuts are possible even if the current inflation rate was above the upper bound of the target band. To be convinced that inflation was heading sustainably towards target, we would have to see evidence that excess demand in the economy had largely been eliminated and that the cash rate was still significantly above the neutral rate.

Is a recession likely? If so, when? If not, why not?

Australia will avoid recession. Consumer spending will slow, but not collapse, as households draw down savings. Data centre capex is also supporting demand over the medium term and rates will stay on hold to avoid tanking the economy unless inflation rises from here.

What developments in the Middle East would trigger a further tightening of monetary policy?

If the price of oil fails to ease by the end of the year, the potential pass-through impact could see underlying inflation increasing, which would lead to further rate rises.

How long do we have to wait before we see the AI deflationary / productivity effect on the economy?

We need to be past the peak of the AI capex boom before the inflationary demand-side impact from the spending abates. The adoption rate of AI by businesses already needs to be in full swing by then for productivity to be picking up. Our best estimate is that a material impact will emerge in 2028.