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Major bank’s warning on rate cut risk

A leading Australian bank has cautioned that any relief for struggling mortgage holders through rate cuts is likely to be delayed later in the year, rather than sooner, as the Reserve Bank prepares for its upcoming board meeting.

The Reserve Bank of Australia (RBA) is widely anticipated to keep the cash rate unchanged at its next meeting, a prediction deemed straightforward following the federal budget.

However, the Commonwealth Bank (CBA) now forecasts that any easing cycle will likely commence later, citing significant uncertainty surrounding inflation estimates.

Gareth Aird, CBA’s Head of Australian Economics, emphasized that recent labor market data does not provide a basis for the RBA to alter its policy stance. CBA anticipates the cash rate will remain steady amid signs of labor market softening across key metrics.

“Trend unemployment and underemployment continue to rise gradually,” Mr. Aird noted in the latest update from CBA Economics. “Hours worked are subdued, and job advertisements are in a clear downward trend.”

“Our expectation of a more pronounced slackening in the labor market compared to the RBA’s projections forms the foundation for our forecast of the RBA commencing an easing cycle in late 2024,” he added. “However, given the challenging inflationary backdrop and the narrowing timeframe until November, the risk to our forecast is increasingly tilting towards a later commencement of the easing cycle.”

Mr. Aird highlighted that economic growth stalled in the first quarter according to national accounts, with GDP registering a mere 0.1% growth. The annualized six-month growth pace dropped to 0.8%.

Despite the RBA’s projection of the unemployment rate averaging 4.0% in the second quarter, CBA underscores considerable uncertainty surrounding these forecasts.

Regarding inflation, Mr. Aird referenced RBA Governor Michelle Bullock’s statement that the federal government’s $300 energy bill rebate is unlikely to substantially impact inflation levels positively or negatively. CBA’s earlier economic analysis estimated that these rebates would decrease the third-quarter CPI by two-thirds of a percentage point.

“While this reduction is significant, the RBA’s focus remains on underlying inflation trends, which exclude the impact of energy rebates,” Mr. Aird explained. “We anticipate that the mechanical drop in headline inflation in Q3 due to rebates will help lower near-term inflation expectations among households and businesses, thereby stabilizing wage expectations throughout 2024/25.”

Mr. Aird anticipated that the RBA would maintain a neutral stance in its accompanying statement following the board’s decision.

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