iscover
iscover 
Conversations around the hotly anticipated February cash rate call have urged the Reserve Bank of Australia (RBA) to begin its monetary policy easing cycle after more than a year of an extended pause, leaving the cash rate at 4.35 per cent since November 2023.
In response, Judo Bank’s economist and chief economic adviser, Matthew De Pasquale and Warren Hogan, have called out that this rhetoric is a distraction from ongoing economic issues.
“Australia’s economic debate has become almost solely focused on the prospect of an interest rate cut in the first half of the year because of the looming federal election,” they said in the latest Judo Bank Economic Snapshot.
“In a sign of how politics undermines the quality of public economic debate, this laser-like focus on a single monetary policy decision distracts from the more significant issues, whether that be stabilising the cost of living or creating a more productive economy.”
Following the latest Labour Force figures released by the Australian Bureau of Statistics (ABS), the ASX Rate Tracker has shown 73 per cent of the market believes the cash rate will fall to 4.10 per cent in February (as of 20 January).
With the unemployment rate edging slightly up to 4 per cent in December from 3.9 per cent, far below the RBA’s quarterly forecast of 4.3 per cent, Hogan and De Pasquale said that the RBA’s assessment on the data will hinge on its assessment of the non-accelerating inflation rate of unemployment (NAIRU) and that many commenters have suggested that it should be downwardly revised.
“The RBA’s latest evaluation of the NAIRU is expected to sit near 4.5 per cent. However, some commentators believe that a decline in wage growth in the last six months suggests the current strength of the labour market is not contributing to inflation,” they said.
“Some argue that the NAIRU is actually closer to around 3.5 per cent. Many economists are also concerned about a potential rapid decline in the labour market, especially considering the high levels of public sector hiring and [expected subdued activity].
“These factors are key reasons why some commentators suggest a rate cut is necessary in February.”
According to Hogan and De Pasquale, there is “little merit” to these arguments and they believe that the central bank should remain steadfast in its efforts to combat inflation – and, in turn, cost of living – instead of pivoting to support an already-strong labour market.
“Our interpretation of the data available is that the economy remains on solid footing and that there is no clear urgency to enter a cutting cycle,” they said.
“Along with the employment figures, EBA wage data from the Fair Work Commission (FWC) for late 2024 and a rise in job vacancies suggest we should be cautious with monetary easing.
“We expect the RBA to hold off on cutting, waiting for more data in 2025 to confirm that (1) inflation is on a sustainable downward trajectory outside of government subsidy impacts, and that (2) resilience in the labour market and potential wage growth isn’t a genuine risk.”
Hogan and De Pasquale said that the February meeting will be “live”, with the possibility of a cut still on the table considering political and social pressure; however, they expect that the RBA will see that the data “calls for caution” and will continue to hold the cash rate until more economic data emerges.
Echoing these sentiments, founder of brokerage Finch Financial, Julian Finch, said there was “no way” the RBA will cut rates in February given the current economic data available.
“While we’d all love to see rates come down, the reality is that economic conditions are still not aligned with the RBA’s targets for reducing interest rates. It’s essential for homeowners and borrowers to plan for high rates for longer,” Finch said.
“The RBA has emphasised that interest rates will remain high until inflation returns to the target range of two to three percent. Currently, inflation is still exceeding three percent, making a rate cut premature.
“Despite previous rate hikes, the economy is yet to show sustained signs of cooling. Continued economic growth and demand are keeping inflationary pressures high.”
The Commonwealth Bank of Australia’s (CBA) head of Australian economics, Gareth Aird, aimed to provide a picture of what would happen should the RBA lower rates next month, saying that a reduction would inject a “direct boost to household income via lower required mortgage payments”.
“But there will also be a boost to consumer sentiment (and also business confidence) when rate relief finally comes,” Aird said.
“Falling interest rates only directly benefit those households that carry debt or intend to borrow. But there will be a net benefit overall to the household sector when rates come down. In particular, we expect to see an improvement in spending outcomes for those households that are more heavily indebted.”
[RELATED: Unemployment rate nudges slightly higher in December]
ISCOVER 
