Stephen Miller
As was universally anticipated, the Reserve Bank of Australia (RBA) Board left the policy rate unchanged at yesterday’s meeting.
The Governor and the Board sought to strike a balanced tone in their assessment of where the economy is and the potential challenges ahead.
That is entirely appropriate.
Economic developments since the last meeting have by and large vindicated the RBA “experiment” in adopting a more cautious approach than its developed country peers in raising the policy rate. That caution involves greater patience in returning inflation to target in an attempt to minimise any increase in the unemployment rate.
But as the Board Statement makes clear, the outlook is at this juncture highly uncertain, making the negotiation of the “narrow path” between a timely return of inflation to target and preventing an excessive dislocation in the labour market difficult.
Recent developments in global financial markets underscore that difficulty.
Absent a recessionary lurch in the global economy, domestic challenges loom prominently.
As worthy as the RBA “experiment” may have been, inflation is still indubitably “sticky” – more so than in the rest of the developed world.
That will probably mean that the RBA will need to be more cautious than its peers in lowering the policy rate.
And as the Board notes in its Statement “momentum in economic activity has been weak…[a]nd there is a risk that household consumption picks up more slowly than expected, resulting in continued subdued output growth and a noticeable deterioration in the labour market.”
The RBA’s inflation containment task has also been frustrated by counter-productive government policies.
The arrangements attaching to wage-setting and industrial relations regulation have complicated the RBA task by making inflation “stickier” and increasing the non-accelerating inflation rate of unemployment or NAIRU.
The Future Made in Australia measures may well have a similar effect.
Fiscal policy in Australia, mostly (but not exclusively) at the state government level has not helped.
Westpac research has shown that net government spending would increase aggregate demand by a chunky 2.2 percentage points of gross domestic product (GDP) in 2024-25, thanks largely to big-spending state governments erroneously purporting to provide cost-of-living “relief”.
With excess demand a primary driver of inflation, that government contribution is problematic, at least those elements that don’t have attenuating and near-term supply-side effects (which arguably the income tax cuts do).
What they do, however, is give the RBA some ability to exercise patience in contemplating any downward adjustment to the policy rate.
An unkinder interpretation is that fiscal laxity has exacerbated inflation pressures and led to a delay of interest rate relief.
As the Board notes, in the interim, it “will rely upon the data and the evolving assessment of risks to guide its decisions.” This includes “developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market.”
In my view the prospect of a further interest rate hike this cycle has receded significantly in the last few weeks.
The debate is now around when the first interest rate cut occurs.
The inflation hurdles to a November rate cut seem high, and to my mind a February 2025 policy rate cut is more likely, as the aforementioned cautious approach to raising the policy rate from the RBA necessitates similar caution on the way down.
Nevertheless, a deterioration in the labour market accompanied by ongoing global economic headwinds attendant on the persistence of the recent tumult in global financial markets might tip the balance to November.
By Stephen Miller, investment strategist
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