Forget about the Reserve Bank cutting interest rates by Christmas – and you can probably douse your hopes for a pre-Easter reduction too.
Reserve Bank governor Michele Bullock made it clear after her board ended its two-day gathering on Tuesday by leaving the cash rate where it’s sat for the past year that she’s in no hurry to bring relief to borrowers.
“We believe that settings are restrictive and we need to keep rates restrictive for the time being,” she told reporters.
Nobody except the wildest optimists expected the RBA would lower interest rates this month (even if some might argue they should). The fact that the board didn’t even bother to consider a rate cut will disappoint.
“The conversation was more around, ‘what would you need to see for us to change direction?’” Bullock said. As per its September meeting, the only option on the table was leaving rates unchanged.
For sure, the board admits the global outlook is “high uncertain”, as anyone with an eye on the US elections can attest. But shy of some political maelstrom erupting there or elsewhere between now and 9-10 December, the RBA’s final board meeting of 2024 will be a formality of extending the rate pause another month.
The RBA board – unless there’s an emergency – won’t reconvene until 17-18 February. By then, we’ll have year-end data on indicators such as inflation (due out 29 January).
The bank’s been happy its recent forecasts have been generally accurate. Its updated predictions – contained in its statement on monetary policy – have underlying inflation only slowing from 3.5% in the September quarter to 3.4% by the end of 2024.
That trajectory is hardly the angle of decline to give Bullock & Co confidence inflation is on track to be “sustainably” within its 2%-3% target range.
It’s plausible the board will wait until the March quarter inflation numbers drop (30 April) before a rate cut is a live option. Then we’re looking at the 19-20 May RBA meeting – quite possibly on the other side of a federal election.
Bullock did, at least, indicate the bank wouldn’t need core inflation – known as the trimmed mean – to be “absolutely back in the band”. Other central banks weren’t waiting for similar tests to be passed and neither would Australia’s.
However, the board would “need to be pretty convinced that it’s heading there”.
Stressed households and businesses undoubtedly have strong cases for rate help as soon as possible.
After all, didn’t those updated forecasts also show GDP growth slowing – compared with the RBA’s August predictions – to 1.5% by the year’s end from 1.7%? And the jobless rate should tick a bit higher, to 4.5% by the end of 2025, from 4.1% now.
The RBA spots signs of resilience in many places. Household consumption has been weaker than expected lately but spending should perk up as the stage 3 tax cuts flow.
These cuts boosted real incomes by 1.3 percentage points in the September quarter (which is why economists likened them to the equivalent of two standard interest rate reductions).
China, easily our biggest trading partner, is also revving up its economy, and that will lift Australia’s. That’s assuming the range of measures – announced and about to be – succeed.
And while many would answer “no” to the question of “are you better off than a year ago”, the RBA reckons household net wealth – after adjusting for inflation – rose 4.5% over the year to June. It’s also up 22% compared with pre-Covid levels and that sense of wealth – particularly for those without debt – will nudge some to spend more.
Public demand growth, too, continues to be adjusted higher in each quarterly forecast update. That expansion is helping to compensate for weak business demand and support the labour market – but also keeping service inflation unacceptably high.
Bullock, in short, is sending a warning to politicians. Big spending promises or rate cuts: you can’t have both.
