The Potential Impact of Chinese Uncertainty on RBA Rate Cuts

A potential Chinese stimulus package could lead the Reserve Bank of Australia (RBA) to postpone the beginning of its monetary easing cycle following surprising job figures that reduced expectations of a rate cut in February.

A better-than-expected Australian Bureau of Statistics labor market report caused economists and bond traders to adjust their forecasts for a rate cut.

However, RBA chief economist Sarah Hunter cautioned that external economic uncertainty could further delay rate cuts.

If China implements a larger fiscal stimulus than anticipated to support its slowing economy, both growth and inflation in Australia could exceed the RBA’s predictions.

“China’s economic trajectory is significant for Australian monetary policy decisions due to its size and position as Australia’s largest export market,” stated Hunter during a speech at the University of Adelaide.

While the RBA views the likelihood of a substantial stimulus package as low, their models indicate that increased Chinese demand and higher Australian household spending from tax cuts could result in inflation remaining above the 2.5 percent target.

“In the best-case scenario, the board may need to consider a tighter policy stance, which could involve a rate hike or an extended hold period,” Hunter remarked.

Weaker economic growth figures and a dovish tone in the RBA’s comments following the December rate meeting on Dec. 10 had raised expectations of a rate cut in February.

However, the unexpected decrease in unemployment to 3.9 percent on Dec. 12, as mentioned by ANZ senior economist Adelaide Timbrell, offset those expectations.

ANZ, Westpac, and NAB predict that the RBA will initiate its easing cycle in May, citing concerns over inflation being too high and unemployment too low.

Yet, two critical data releases could sway the RBA to act sooner.

Contrary to the consensus, Commonwealth Bank (CBA) remains optimistic about a rate cut in February.

Despite acknowledging that the labor market data weakened the case for a cut, CBA economist Gareth Aird believes upcoming inflation and labor market reports before the RBA’s next meeting could prompt a change in stance.

According to Aird, for a February cut to occur, trimmed mean inflation must fall below 0.6 percent for the December quarter, significantly less than the 0.8 percent in the September quarter.

Additionally, indications of a softening labor market are necessary, Aird added.

Recent wage data implies that the RBA shouldn’t be overly concerned about the low unemployment rate contributing to inflation, Aird observed.

The RBA’s estimated non-accelerating inflation rate of unemployment (NAIRU) stands at 4.5 percent, representing the unemployment rate at which stable inflation is maintained.

“Australia could sustain an unemployment rate of around 4.0 percent while keeping inflation within the target range,” Aird stated. “However, it’s unclear if the RBA shares or is warming up to our viewpoint.”

Aird highlighted data from Seek’s November job report, which painted a less optimistic labor demand picture.

Job postings declined by 1.1 percent, while applications per job ad saw a 3.4 percent increase, the highest since April.

Although bond traders maintain some optimism, the probability of a February rate cut in the money market decreased to 55 percent from over two-thirds.