Those hoping for lower interest rates soon – whether stressed borrowers or those in the Albanese government itching for an early election – would have been dismayed by the Reserve Bank of Australia governor Michele Bullock’s media conference on Tuesday.
The RBA board had just wrapped up the eighth meeting under her leadership and considered just two options for its key interest rate: “hold for some time” or another rate hike. A rate cut was not up for discussion.
Bullock made it clear market expectations, which have lately swung towards a rate reduction – perhaps even two, this year – were “not aligned” with the bank’s present thinking.
The board meets again in September, November and December. But as “six months” was the soonest a rate cut was a reasonable prospect, borrowers will have to wait until February at the earliest for relief (or even later depending on how soon commercial lenders pass on the reduction).
The world, of course, is full of uncertainties, not least in equity markets. These had been tracking at what Bullock called “rich evaluation” levels in some places before the past three weeks of falls erased $A10tn up to Monday, according to Bloomberg.
The ASX shed a hefty $160bn in two days before steadying with a 0.4% rise on Tuesday – even with the RBA’s disappointing view on rate cut chances.
The most recent days of market turmoil were largely in response to “one number” – weak US employment figures – and amounted to “a bit of an overreaction”, Bullock said.
The board received multiple market briefings but they didn’t sway the wider assessment on the economy as laid out by the RBA’s latest quarterly statement on monetary policy (and completed using data to 31 July).
The RBA knows things can break in favour or against its goal of maintaining a downward path for inflation while maintaining the job gains of the pandemic period. For now the odds look unfavourable.
A crude distillation of the 60-odd page statement might be: “upside” risks to be pushed off that path appear 17 times and “downside” ones just five times.
Australia’s official interest rate has been relatively low given the level of inflation, compared with many overseas counterparts, the RBA concedes. But the tolerance has a limit since inflation remains “persistent” and “too high”, and the underlying measure has “fallen very little over the past year”.
That limit could yet be tested, prompting a 14th rate rise in this cycle.
In the RBA’s updated assessment, demand in the Australian economy continues to outstrip supply, financial conditions are less restrictive than thought, and the labour market has held up better than anticipated.
Capping all that off, productivity growth – the best way out of this bind – was “still weak” even as wages growth remained high, it said.
Revisions to forecasts don’t instil a lot of confidence that rates are high enough to do the desired deflationary job.
Economic growth will avoid a recession (unless population growth is excluded) and is projected to accelerate. By this time next year, the economy will be expanding at a 2.6% annual clip, or a good half a percentage point more than forecast three months ago.
Expect some confusing inflation narratives, too.
Thanks to government rebates, the headline inflation rate will drop to the upper end of the 2%-3% range by the end of 2024 instead of hovering at 3.8% as forecast by the RBA in May. Federal treasury has a similar forecast.
You might think that indicates rate cuts are coming.
But the RBA’s real focus is on the trimmed mean – AKA the underlying or core – measure of inflation. That gauge won’t come near that upper end of the target band until the second half of 2025, the forecasts suggest.
The statement also said the bank will “look through volatility in prices and the effect of one-off or temporary measures that do not influence the underlying degree of price pressures in the economy”. (Cue a pre-election budget that promises rebate extensions.)
The treasurer, Jim Chalmers, can’t take a lot of solace from this outlook but they are only forecasts.
A lot of things could go awry: a widening Middle East war, political tension in the run-up to the US presidential election, climate-related disasters and a renewed meltdown in financial markets, are all plausible without speculating on other grim events.
One consolation is that an Australian economy running near or exceeding capacity will have a bit more of a buffer than most. And there would be interest rate cuts.
