What Would the RBA Do if the Fed Implements a 50bp Rate Cut?

Citi economists have analyzed the potential reactions of the Reserve Bank of Australia (RBA) to a significant rate cut by the U.S. Federal Reserve. This commentary arises amid growing speculation regarding central bank strategies globally and recent statements from the RBA’s Governor and Deputy Governor, who have expressed resistance to the idea of interest rate reductions within this year.

Citi suggests that the RBA’s communication approach could change if the Federal Reserve proceeds with a notable policy rate cut of 50 basis points during its upcoming meeting. The research firm believes that such an action could create market optimism and increase expectations for more aggressive easing by the RBA. However, they maintain that it is unlikely the RBA will reduce rates in 2023, regardless of the Federal Reserve’s decisions.

In their note, Citi economists stated, “If the US Fed does indeed cut by 50bps in the September meeting, then the following RBA meeting carries risks of more hawkish guidance from Governor Bullock in opposition to market pricing.” They emphasized that unless there is an unexpected decline in inflation or a spike in the unemployment rate, the RBA is not expected to lower rates this year, even if the Fed implements 50bps cuts.

Citi concluded by noting that the only significant data point before the next RBA meeting is the upcoming August Labour Force Survey.