Why Reserve Bank of Australia is not cutting rates yet

The Reserve Bank’s call to keep rates on hold has been barely affected by the recent decision in the US, but there are indicators of when they’ll be dropped, writes John Rolfe.

One of the only new observations in the Reserve Bank of Australia’s post rates meeting statement today is this: “While headline inflation will decline for a time, underlying inflation is more indicative of inflation momentum, and it remains too high.”

Whilever the RBA is of that view, there will be no rate cut.

Today’s statement is otherwise very similar to what the Reserve said after its last meeting six weeks ago.

There is no sign of a loosening of monetary policy until at least February.

Reserve Bank of Australia Governor Michele Bullock. Picture: AAP

The RBA’s thinking has been barely affected by the recent decision in the US to lop 0.5 per cent from the cost of money.

This is because the RBA is still very concerned about inflation.

The US Federal Reserve is most worried about a cooling labour market. Inflation is now less of a headache there.

Our labour market is still pretty hot – fuelled mainly by new public sector jobs – so the Reserve doesn’t need to cut to support it in the short term.

So the timing of the first cut here will be highly reliant on what happens with inflation.

The consumer price index for the month of August will be released by the Australian Bureau of Statistics on Wednesday. This may show the pace of price rises has fallen back into the RBA’s target band of 2 to 3 per cent.

But that will be fake news, in a way, because the decline will be mainly due to the federal government’s electricity bill rebates which are artificially lowering the cost of power. The headline figure will look good, but the underlying situation won’t be as rosy.

The next detailed analysis on inflation will be published by the ABS at the end of October, just before the RBA board meets again.

Inflationary pressures will likely have eased, but not nearly enough for Michele Bullock to press go on cuts.

Most economists are forecasting rate cuts to begin early next year.

If you’ve got a home loan, you may be cheered by the fact that money markets have a full one per cent of reductions (that is, four quarter-point cuts) priced in by September next year.

Originally published as Why Reserve Bank of Australia is not cutting rates yet