The good news is the Reserve Bank is all but done lifting interest rates. Less good news is that the central bank is also not about to cut them.
Those were probably the key takeaways from the RBA’s sixth board meeting of 2024 and the seventh since it last slugged borrowers with it’s last cash rate hike.
The nine members surfaced from their figurative bunker on Tuesday afternoon to remind everyone inflation remained “too high” and “persistent”.
Importantly, for the first time since March, the board did not “explicitly consider an interest rate rise” at the two-day gathering. That admission, by governor Michele Bullock, promptly sent the Australian dollar into a short swoon as investors erased lingering worries the RBA was seriously considering another a rate rise.
“We think we’re in the right spot,” Bullock said towards the end of her media conference.
Indeed, Bullock is so confident current settings are restrictive enough to lower inflation without “crashing the economy”, she has made up her mind about August’s inflation figures even before they are released tomorrow. She also has a fair idea about how September is travelling.
“Progress in getting underlying inflation down has slowed and is likely to have remained slow in the September quarter,” Bullock said. “We judge that the level of demand is still above the economy’s ability to supply goods and services, but that gap is closing.”
For one thing, monthly consumer price inflation numbers are “quite volatile”, she said. Tomorrow’s numbers will also capture more services than July’s, and since the energy rebates (federally and in states such as Queensland and Western Australia) will feature prominently, economists expect headline numbers to land well within the RBA’s 2-3% target range.
Bullock, though, isn’t convinced underlying inflation – that removes the 15% of the largest price rises and falls – is on that same track.
“Headline inflation is expected to fall further temporarily, as a result of federal and state cost of living relief,” the bank said. “However, our current forecasts do not see inflation returning sustainably to target until 2026.”
Services – once the rebates are removed – are still rising in cost and supplies of goods going into buildings, among others, are still “relatively high”, Bullock said.
“Demand is still a little bit above supply” even if that output gap is shrinking, she said. Having productivity levels mired at 2016 levels isn’t helping either.
Events may yet throw out predictions, which is why the RBA’s forecasts come with error bands. (It’s also why Bullock continues to “rule nothing in or out” so she doesn’t get caught in a “forward guidance” trap that prematurely ended the career of her predecessor, Philip Lowe.)
One obvious glitch in projections is that the bank only factors in announced government spending. Since the Albanese government has yet to promise energy rebates for next financial year, the RBA assumes they lapse.
As a result, the bank currently predicts headline inflation to pick up in the second half of next year when rebates expire. Of course, it’s likely the major parties will go to the next elections promising largesse at least as large.
There’s a shrinking chance – at least on what know now – of an interest rate cut in 2024, and hence of an early federal election.
The treasurer, Jim Chalmers, and his treasury secretary, Steven Kennedy, have argued an increase in government spending this year (as the budget swings from surplus to deficit) wasn’t stoking inflation because cost of living relief lowered headline CPI.
And since a host of payments – such as pensions – adjust to that mechanic cut, inflation pressure are being relieved, or so the two will likely claim anew. (The RBA ignores those often highly political debates, focusing instead on how aggregate demand changes.)
From the bunker, meanwhile, the RBA surveils a global scene shifting towards lower interest rates that will help trim inflation as the Aussie dollar strengthens and makes imports cheaper. That movement includes US, UK, the European Union, New Zealand and – during day 2 of a board meeting itself – China.
The success of the latter’s sweeping efforts to revive ailing growth – from shoring up stock markets and nudging banks to lend more – in our biggest export market may well determine what the RBA thinks is a sweet spot for Australia.
Peter Hannam is Guardian Australia’s economics correspondent
