{"id":710135,"date":"2025-02-20T09:00:43","date_gmt":"2025-02-19T22:00:43","guid":{"rendered":"https:\/\/www.gomarkets.com\/?p=710135"},"modified":"2025-02-20T10:07:43","modified_gmt":"2025-02-19T23:07:43","slug":"the-gun-has-been-fired-but-is-that-it-the-rba-the-aud-and-a-thud","status":"publish","type":"post","link":"https:\/\/www.gomarkets.com\/en\/articles\/central-banks\/the-gun-has-been-fired-but-is-that-it-the-rba-the-aud-and-a-thud\/","title":{"rendered":"The gun has been fired: but is that it? The RBA, the AUD, and a thud"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">So for the first time in over four years the Reserve Bank of Australia (RBA) has cut the official cash rate by 25 basis points to 4.1%. They fired the gun they&#8217;ve loaded it for the possibility of more but are they blanks?<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Let&#8217;s drive into what was said in the statement, what outlook was given and what this means for the Australian dollar and your trading going forward.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">First \u2013 the action.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The RBA made its first move in over a year 15 months to be exact, cutting the cash rate by 25 basis points to 4.1% at its February meeting. This marks the first rate reduction since November 2020, and marks what looks to be the other side of the \u201cTable Top\u201d mountain effect for the cash rate as we had discussed when the hike cycle began.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">While the cut itself was widely expected &#8211; the RBA went full hawk in explaining what the outlook and rate cutting cycle will look like particularly on expectations of an extended easing cycle.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">To really highlight this point, have a look at the AUD when RBA Chair Michele Bullock was speaking on this point during her press conference. The short reversal is telling.<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-408629\" src=\"https:\/\/www.gomarkets.com\/au\/wp-content\/uploads\/2025\/02\/1.png\" alt=\"\" width=\"1211\" height=\"594\" \/><\/p>\n<p><span style=\"font-weight: 400;\">The crux of the whole position is &#8211; the RBA acknowledges progress on inflation but remains cautious about declaring victory. And that is a fair position to hold, core inflation is running at 3.2% and headline at 2.4%. Yet the bank is forecasting headline inflation to flare to 3.7% come December with core (trimmed mean) at 2.7% unchanged for TWO AND A HALF YEARS!<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It reflects a delicate balancing act\u2014while inflation is tracking lower, the labour market remains unexpectedly tight. The central bank wants (needs) more evidence before committing to further cuts, making it clear that markets are getting ahead of themselves hence the moves in the AUD.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It begs the question:<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><b>Why Cut Rates Now? The Inflation-Labor Market Trade-Off<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Clearly the RBA\u2019s decision to ease policy was largely driven by better-than-expected inflation data in Q4 2024. Disinflation has been happening faster than anticipated, which gave the central bank confidence to remove some policy restrictiveness, which it has always said it would as soon as it thought it could.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But inflation is only one side of the equation.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The flip side is the labour market \u2013 which is hot and running hotter than expected.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Unemployment remains at 4.2%, below the RBA\u2019s estimated full employment level of 4.5%. While job vacancies have eased slightly, demand for workers remains strong, which could keep wage pressures elevated. Caveat \u2013 the wage price index the day after the RBA meeting came in at 3.2% meaning in real wages terms wages growth is 0.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But \u2013 it still presents a risk: easing too much too soon could reignite inflation, particularly in wage-sensitive sectors like services. Hence the hawkish stance.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">As mentioned inflation is projected to settle at 2.7%\u2014still above the 2.5% midpoint of its target range\u2014while unemployment is expected to remain relatively low. This suggests that the RBA is not entirely convinced that inflation will continue declining without further policy restraint. The central bank is effectively saying: &#8220;We\u2019ll cut where possible as we don\u2019t want to leave policy restrictive any longer than necessary, <\/span><i><span style=\"font-weight: 400;\">but<\/span><\/i><span style=\"font-weight: 400;\"> we\u2019re not ready to call this the start of a full easing cycle.&#8221;<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><b>Is this just new aged jawboning? Moderating the Market<\/b><\/p>\n<p><span style=\"font-weight: 400;\">We feel we are now entering a new phase \u2013 upside jawboning a deliberate ploy to temper market expectations and more importantly \u2013 the consumer. The concern is that easing policy could trigger a rebound in spending, asset prices, and broader economic activity\u2014creating inflationary pressures that could undo recent progress.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This is why Governor Michele Bullock took a firm stance in her press conference, directly challenging the market\u2019s expectation of multiple rate cuts and described the market\u2019s pricing\u2014which holds three additional cuts in 2025\u2014as &#8220;<\/span><i><span style=\"font-weight: 400;\">far too confident<\/span><\/i><span style=\"font-weight: 400;\">.&#8221;<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In short the Board\u2019s message is clear: February\u2019s cut does not automatically signal a sustained easing cycle. The Board remains data-dependent and will only consider further rate reductions if inflation risks subside and the labour market shows definitive signs of cooling.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><b>What\u2019s the biggest threat to the RBA?<\/b><\/p>\n<ol>\n<li><b> The Federal Election and Fiscal Policy<\/b><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">Never underestimate a government and spending money \u2013 which makes fiscal policy risk number 1. With a federal election due by May 17, government spending could play a significant role in shaping the economic outlook. If fiscal stimulus is ramped up, through cost-of-living relief measures or infrastructure spending, it will add upward pressure to inflation, thus reducing the urgency for further rate cuts.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The RBA has explicitly stated that its forecasts <\/span><i><span style=\"font-weight: 400;\">do not assume<\/span><\/i><span style=\"font-weight: 400;\"> any additional election-driven spending, meaning any surprises on this front could alter the rate outlook and the 3.7% headline figure could be worse.<\/span><\/p>\n<ol start=\"2\">\n<li><b> Consumer and Housing Market Reactions<\/b><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">Another key factor is how households respond to this rate cut. If consumer confidence rebounds strongly and household spending picks up, this may also signal a reassessment. Housing both prices and construction activity will be other critical indicators. A surge in property market activity, driven by lower borrowing costs, could create renewed inflationary pressures, forcing the RBA to hold back on further cuts. And let\u2019s be honest this has happened every easy cycle.<\/span><\/p>\n<ol start=\"3\">\n<li><b> Global Economic, Geopolitics<\/b><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">The broader global economic landscape also plays a role. If central banks in major economies, such as the US Federal Reserve, move more aggressively on rate cuts, this could influence the RBA\u2019s decision-making. A more dovish global monetary environment could ease financial conditions in Australia, allowing the RBA to be more patient in its approach. Counter this with trade tariffs, trade wars and tit-for-tact reactions that increase inflation may lead to not only a long pause but also the risk of hikes.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><b>Crystal ball time<\/b><\/p>\n<p><span style=\"font-weight: 400;\">For now, the market has a cut fully priced in by the July meeting but the risk of a delay is growing. The RBA\u2019s cautious approach suggests it wants more time to assess how inflation, employment, and economic activity evolve before making another move, suggesting September is a more likely month for the next cut, all things being equal.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Ultimately, the path forward remains highly uncertain. This means the central bank is unlikely to move quickly, and expectations of a rapid series of rate cuts may need to be revised. Hence as traders the AUD weakness may now have found a floor as cuts are not going to be as forthcoming.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In short: while this cut marks the beginning of policy easing, it\u2019s far from a signal that the RBA is on an aggressive cutting path. The data will dictate the next steps, and for now, the Board remains firmly in watch-and-wait mode.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>So for the first time in over four years the Reserve Bank of Australia (RBA) has cut the official cash rate by 25 basis points to 4.1%. They fired the gun they&#8217;ve loaded it for the possibility of more but are they blanks? Let&#8217;s drive into what was said in the statement, what outlook was [&hellip;]<\/p>\n","protected":false},"author":94,"featured_media":710137,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[2805,4382],"tags":[],"class_list":["post-710135","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-central-banks","category-featured"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v24.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>The gun has been fired: but is that it? 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