Down under central banks take rate cut time-outs

Wells Fargo Research Team Wells Fargo

The Reserve Bank of Australia (RBA) surprised markets this week by holding its policy rate steady at 3.85%, in contrast to widespread expectations for a rate cut. While acknowledging the latest slowing of inflation, the central bank said data were marginally stronger than expected and that private domestic demand is recovering gradually. As a result the RBA said it could wait for a little more information to confirm that inflation is trending towards target.

Based on the RBA's announcement, we expect a gradual quarterly pace of rate cuts to continue. That said, we see potential for a more extended easing cycle than previously. We are less convinced of the underlying strength of domestic demand. Should inflation pressures continue to ease, we expect 25 bps rate cuts in August, November and February, bringing the RBA's policy rate to a low of 3.10% by early next year.

For the Reserve Bank of New Zealand (RBNZ), this week's decision to hold its policy rate steady at 3.25% was widely expected. The central bank said elevated export prices and lower interest rates were supporting growth, but that global trade and tariff uncertainties provided some offset. The RBNZ said that is medium-term inflation pressures continue to ease as projected, it expects to ease monetary policy, which we view as broadly consistent with our outlook for 25 bps rate cuts at the August and November meetings, which would see the RBNZ's policy rate reach a low of 2.75%.

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Wells Fargo Research Team

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