RBA leaves rates unchanged at 4.35%: Callam Pickering, APAC economist at Indeed

Assessment and implications

At their March meeting, the RBA left rates unchanged at 4.35%. The cash rate is currently at its highest level since November 2011. 
 

"Global and domestic inflationary pressures continue to ease and there is a solid chance that core inflation returns to the RBA's target ahead of schedule," said Callam Pickering. "Rate cuts in the second half of the year are a distinct possibility, albeit far from certain."
 

"The inflation battle isn't necessarily won - given uncertainty and concerns around service sector inflation and productivity - but it is certainly headed in the right direction. Service sector inflation is easing, although perhaps not as quickly as the RBA would like. Nevertheless, with domestic demand quite anaemic there is a good chance that further easing will take place over the next few quarters."
 

"Wage growth and productivity growth remain at loggerheads. The RBA's outlook for productivity growth remains a clear source of risk and any deviation from the RBA's productivity forecast could have profound implications for monetary policy. As it currently stands, the current combination of wage growth and productivity growth appears inconsistent with a sustainable return to the RBA's 2-3% inflation target. Something will need to change." 

"The RBA needs to be mindful of these issues, such as productivity growth, but they must also remember that monetary policy is most effective when it is proactive. The long lag with which monetary policy impacts the Australian economy means that waiting for core inflation to return to target may leave them poorly positioned to navigate the next big economic challenge. In that sense, a pre-emptive rate cut in the second half of the year, prior to core inflation reaching its target, is perhaps the best way to avoid a significant downturn or recession." 

Australian households are doing it rough

"Australian households continue to grapple with cost-of-living pressures. Retail volumes per capita have now fallen for six-consecutive quarters. Households are relying on their accumulated savings and borrowing to maintain their consumption patterns, following a significant decline in real household disposable income."
 

"Household spending continues to be supported by low unemployment and high population growth. However, labour market conditions are gradually easing and population growth is expected to ease considerably this year, as the lingering impacts of the pandemic diminish."

Monetary policy consideration
 

"Outside of the labour market, the recent data flow gives a clear sense of an economy that is struggling. There aren't many bright spots outside of low unemployment and relatively strong job creation."

"Tight monetary policy continues to curb demand and that can clearly be seen across a wide variety of economic indicators. Inflation continues to ease both domestically and globally, with household spending weak and labour market indicators softening a little. Monetary policy appears to be working."

"Our view is that economic conditions will remain subdued this year, consistent with what we have seen recently. The risks to the economic outlook seem to lie primarily to the downside. And that should prove sufficient to bring inflation back to target, likely ahead of the RBA's current forecasts. The market is currently pricing in one rate cut this year and that's an increasingly plausible scenario in the second half of the year."