Going by the stance of the US Federal Reserve and Australia’s inflation, wages and jobs data, the Reserve Bank has no excuse for not lowering interest rates from 4.35% as soon as possible.
The Fed recently cut rates for a second time — its cuts now total 0.75 percentage points since September — even though US consumer inflation on both a headline and core basis is still above the target of 2%. But as chair Jay Powell said last week, the central bank is confident inflation would fall sustainably to the target range even as it cuts rates to move monetary policy to a more neutral position.
Despite US October inflation data having come in slightly hotter than expected, with CPI at 2.6% and core inflation at 3.3%, markets still expect another rate cut from the Federal Reserve in December. In Australia, those sorts of numbers would have had inflationistas and the Financial Review demanding a rate rise.
Like here, the US has an issue with housing costs, primarily due to higher rents — they were up 0.4% in October alone and up 4.9% over the past year. That accounted for more than half the monthly rise of 0.2%. Powell singled out housing inflation as one area to watch as it had “yet to normalise”.
But as we’ve previously pointed out, the Federal Reserve is proceeding with interest rate cuts despite a highly stimulatory fiscal policy in America — and the looming inflationary impact of Trump’s tariffs, which the central bank says it will wait to see in legislation before responding.
Here, the September quarter CPI saw a headline rise of 2.8% and a core (trimmed mean basis) rise of 3.5% — not all that different from the US situation. We have a problem that America doesn’t have: a non-competitive aviation market, which saw steep rises in airfares (up 3.2% in October and a big factor in our September quarter rise in consumer inflation), reflecting Qantas’ price gouging in the wake of Rex Airlines going into administration.
Last week’s wage price index report for the September quarter and the October jobs report are further evidence the RBA should be cutting — and now. The WPI data was weaker than expected and held up by public sector growth in areas like the care economy, and by — like every September quarter — the Fair Work Commission annual wage decision. The 0.8% rise for the quarter was the same result as the previous two quarters back to the start of 2024, meaning another steady result and annual growth will slip to around 3.2% — levels we last saw in early 2022.
The October jobs report was solid but not a patch on previous months, with just 16,000 new jobs, compared to a combined 100,000-plus new jobs in August and September. Unemployment remains at 4.1%, but for how long if jobs growth continues to weaken?
If the RBA is waiting for the jobs market to deteriorate markedly before it moves, any benefits of lower rates will enter an economy already suffering rising unemployment. And given the lag times of monetary policy, that could mean a long wait — until 2026 — for growing numbers of unemployed Australians.
Powell and the Federal Reserve have confidence in their understanding of the US economy and its inflation drivers, and the need to be proactive on monetary policy to avoid harming growth too much. They have backed their judgement that US inflation will continue to fall. The contrast here is significant: a central bank that appears to be at a loss as to the trajectory of inflation, and too intimidated by markets and the economic commentariat to display any initiative.
If Australia’s inexperienced central bank waits until next year, RBA governor Michele Bullock, during her first federal election cycle, will discover just how much pressure will be on her from the AFR and News Corp not to cut rates, given its possible impact on the election.
The RBA, it appears, won’t move until it’s forced to — and working households will pay the price.
