Stephen Miller
RBA Governor Michele Bullock cast a hawkish hue over the most recent RBA Board decision to leave the policy rate unchanged at 4.35 per cent at its August meeting. In particular, her affirmation that the Board considered a policy rate rise (but not a cut) combined with an assessment that any near-term reduction in the policy rate was unlikely had led the market commentariat thinking (rightly in my view) that any reduction would need to wait until 2025.
The improbable circumstance of a rate reduction this year would seem to hinge on a rapid deterioration in the labour market.
As Fed Chair Powell emphasised today the Fed is now focussed on the labour market side of its dual mandate reflecting a view that the inflation risks have diminished while labour market conditions are at some risk of deterioration. That allowed the Fed to cut the policy rate by 0.5 per cent to a target of 4.75-5.00 per cent (still well above the RBA target of 4.35 per cent).
The RBA too has a dual mandate but at this stage is faced with relatively “stickier” inflation and arguably a better-performed, if fragile, labour market.
The Australian circumstance is perhaps no coincidence given that the RBA has been less aggressive than the Fed in raising the policy rate to tackle inflation.
The flip side is that it might need to exercise a little more patience when it comes to cutting the policy rate.
Today’s August labour force data will hardly move the dial for the RBA. The unemployment rate was unchanged at 4.2 per cent while the number of employed persons jumped 47,500, albeit that was wholly concentrated in a jump in the number of part-time employed.
The Board noted in its Statement following the August meeting that ‘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.’
On that score, today’s labour force data will disappoint those looking for an “early” policy rate cut.
There is no ‘noticeable deterioration in the labour market’ upon which the RBA might be able to signal the possibility of a near-term policy rate cut.
And unless there is either some wholly unanticipated, and at this stage unlikely deceleration in inflation, that is at a pace greater than revealed by the most recently issued RBA forecasts, or any unlikely and significant deterioration in the labour market between now and the November meeting, any RBA policy rate reduction this year is a remote prospect.
The RBA’s inflation containment task continues to be frustrated by counter-productive government policies despite some tortured political commentary that denies that circumstance.
In the Australian context the arrangements attaching to wage-setting and industrial relations regulation have complicated the RBA task by making inflation “stickier” and potentially leading to an increase the non-accelerating inflation rate of unemployment or NAIRU.
The Future Made in Australia measures may well have a similar effect.
As will a swathe of other productivity sapping and opaque regulatory arrangements.
Fiscal policy in Australia, mostly (but not exclusively) at the state government level has not helped.
In noting that, I accept that fiscal policy has a remit that goes beyond inflation containment to encompass distributional, welfare and other objectives.
However, much of the increased spending, again mainly (but not exclusively) at the state level, is poorly constructed and unlikely to realise its stated objectives.
Government spending is likely to increase aggregate demand by a chunky couple of percentage points of 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.
My sense remains that February 2025 remains the most likely time for the first reduction in the policy rate from its current level, but it could be as late as May 2025.
By Stephen Miller, investment strategist.
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