Scott Solomon, Co-Portfolio Manager of the T. Rowe Price Dynamic Global Bond Strategy shares his comments on why rate cuts may not help the RBA.
A lot can change seemingly overnight in the world of central banks. Looking ahead, we think the second half of 2024 is poised to have a pivotal impact on Australia for the rest of the decade.
Australia continues to struggle with wealth inequality, which has manifested itself through deteriorating housing affordability. While overall GDP growth shows improvement, per capita growth is negative. For example, under normal conditions a strong housing market translates to strong lending and construction markets. However, the unique nature of this cycle has not seen this transpire.
This translates to a very difficult job for the RBA as it continues to try and thread the needle of controlling for inflation but also trying to limit excessive pressure on the consumer and households, which are undoubtedly weak. And these impacts are negatively skewed towards younger Australians who on balance own homes at a much lower rate than their parents.
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Luckily, inflationary pressure does appear to be waning and we expect inflation will fall within the desired range about a quarter before current RBA estimates. The RBA is unlikely to hike. While we don’t expect Governor Michele Bullock to commit to cuts, it’s unlikely she does much to push back against them. The rest of her global central bank counterparts are dovish – peer pressure is tough to avoid.
Globally, growth has slowed, and central banks are at the early stages of a cutting cycle. We expect less cuts than what is currently priced as even slight rate adjustments may quickly translate to growth. We are not in a financial crisis: growth has been driven by government spending instead of increases in credit.
The concern is that this is only temporary. The problems of wealth inequality in Australia appear structural and are not going away without some sort of changes from government policy. It’s clear the RBA has recognized this and has noted several times they can’t tackle it alone.
With the Federal Election looming next May, voters will face a multitude of decisions. The unfolding events in the remainder of the year will undoubtedly shape the future trajectory of Australia and set the tone for the decade ahead.
