Interest rates are highly likely to remain on hold at 4.35% at next week’s RBA board meeting.
At this stage the RBA has no other option but to keep interest rates on hold as inflation is still too high—tracking at around 3.8%.
The Australian economy is weakening, consumer confidence and spending continue at record low levels, unemployment is slowly ticking higher and the recent quarterly GDP barely made it into positive territory at +0.2%. Had it not been for government spending GDP would have likely gone negative.
The current RBA restrictive interest rate settings should eventually crimp demand enough for inflation to fall back within the RBA’s 2-3% band. This will then allow the RBA to begin cutting interest rates. The big question as always is, when?
A prisoner of it’s previous mistakes
To an extent the current RBA is a prisoner of the mistakes made by the previous RBA Governor. Unfortunately this probably means that the current Governor, Michelle Bullock, will move very cautiously to avoid making a mis-step, potentially losing her job like the previous RBA Governor.
Given this, I think Governor Bullock will want to see real credible evidence that inflation will reach the RBA’s target before cutting. The most comprehensive inflation benchmark is the quarterly CPI inflation numbers. These are out on 30 October 2024 and again, 29 January 2025. If inflation hasn’t fallen sufficiently by 30 October 2024, I think she will wait until after 29 January 2025.
Most likely that rate cuts will come in the first quarter of 2025.
It’s often asked why the RBA is so resolute and so determined in it’s inflation fight. Inflation acts like a silent tax that keeps on taking from all aspects of the economy. Left unchecked prices would spiral out of control and do greater damage to the entire economy than what high interest rates are currently doing. Low consistent inflation gives people confidence to invest, risk and plan for the future.
RBA Charter
To better understand the RBA’s thinking it’s important to understand that the RBA operates as an independent entity governed by a set of key charters provided to it by the Australian government. Those rules are as follows;
- the stability of the currency of Australia;
- the maintenance of full employment in Australia; and
- the economic prosperity and welfare of the people of Australia.
A key policy benchmark that the RBA uses to achieve these objectives is, “…to keep consumer price inflation between 2 and 3 per cent, on average, over the business cycle”.
Unfortunately, the only practical tool the RBA currently has to directly influence inflation is with its interest rate settings.
USA cuts by 0.50%
The USA Central Bank (the Fed) this week cut interest rates for the first time in 4 years by 0.50%. The Fed seems to be shifting from fighting inflation to protecting against an economic downturn. Maybe our RBA Governor will need to change tact and do the same.
If the Fed keeps cutting interest rates there is only so long the RBA can stay on hold without also cutting. However a higher $AUD exchange rate leads to cheaper imported prices which then leads to lower inflation.
Watching how the RBA reacts in the next 6 months will be interesting.
Let’s see!
RBA – a prisoner of its past mistakes
Interest rates are highly likely to remain on hold at 4.35% at next week’s RBA board meeting.
At this stage the RBA has no other option but to keep interest rates on hold as inflation is still too high—tracking at around 3.8%.
The Australian economy is weakening, consumer confidence and spending continue at record low levels, unemployment is slowly ticking higher and the recent quarterly GDP barely made it into positive territory at +0.2%. Had it not been for government spending GDP would have likely gone negative.
The current RBA restrictive interest rate settings should eventually crimp demand enough for inflation to fall back within the RBA’s 2-3% band. This will then allow the RBA to begin cutting interest rates. The big question as always is, when?
A prisoner of it’s previous mistakes
To an extent the current RBA is a prisoner of the mistakes made by the previous RBA Governor. Unfortunately this probably means that the current Governor, Michelle Bullock, will move very cautiously to avoid making a mis-step, potentially losing her job like the previous RBA Governor.
Given this, I think Governor Bullock will want to see real credible evidence that inflation will reach the RBA’s target before cutting. The most comprehensive inflation benchmark is the quarterly CPI inflation numbers. These are out on 30 October 2024 and again, 29 January 2025. If inflation hasn’t fallen sufficiently by 30 October 2024, I think she will wait until after 29 January 2025.
Most likely that rate cuts will come in the first quarter of 2025.
It’s often asked why the RBA is so resolute and so determined in it’s inflation fight. Inflation acts like a silent tax that keeps on taking from all aspects of the economy. Left unchecked prices would spiral out of control and do greater damage to the entire economy than what high interest rates are currently doing. Low consistent inflation gives people confidence to invest, risk and plan for the future.
RBA Charter
To better understand the RBA’s thinking it’s important to understand that the RBA operates as an independent entity governed by a set of key charters provided to it by the Australian government. Those rules are as follows;
A key policy benchmark that the RBA uses to achieve these objectives is, “…to keep consumer price inflation between 2 and 3 per cent, on average, over the business cycle”.
Unfortunately, the only practical tool the RBA currently has to directly influence inflation is with its interest rate settings.
USA cuts by 0.50%
The USA Central Bank (the Fed) this week cut interest rates for the first time in 4 years by 0.50%. The Fed seems to be shifting from fighting inflation to protecting against an economic downturn. Maybe our RBA Governor will need to change tact and do the same.
If the Fed keeps cutting interest rates there is only so long the RBA can stay on hold without also cutting. However a higher $AUD exchange rate leads to cheaper imported prices which then leads to lower inflation.
Watching how the RBA reacts in the next 6 months will be interesting.
Let’s see!
by Boris Sfiligoi
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