Bullock follows rate cut with a bucket of cold water

Fifty months.

That’s the length of time between rate cuts at the Reserve Bank after it decided to loosen the monetary policy noose around the Australian economy for the first time since November 2020.

Whether it loosens the noose around Anthony Albanese’s government is another story, given the way the bank heavily qualified the decision to take the cash rate down to 4.1 per cent.

As Michele Bullock was at pains to make clear during her press conference, financial markets expecting the RBA to deliver another three rate cuts in the next 15 months are effectively being “unrealistic”.

For those mums and dads dancing in their lounge rooms at the thought they’ll save $100 a month on the mortgage because of Tuesday’s rate cut, it was a bucket of cold water.

In the jargon-filled language of central banks, this was a “hawkish” cut. In layman’s terms, that means people shouldn’t get carried away with the idea that interest rates are going to fall dramatically.

Reserve Bank governor Michele Bullock addresses the media on Tuesday.Credit: Bloomberg

That’s evident in the bank’s forecasts and the heavy qualifications it has attached to many of them.

The economy is really struggling. Growth this financial year of just 2 per cent, a downgrade of 0.3 percentage points from where the bank had expected it to be, points to an economy barely getting by.

It is still propped up by government spending, although to be clear, some of this is government handouts that have reduced prices for electricity and rent. And federal defence spending – which both sides of politics are committed to increasing – is also playing a role.

Household consumption, which drives the economy, is still stuck in first gear, as is business investment.

While the economy gasps for breath, the jobs market is taking in oxygen as effortlessly as a high-altitude ultramarathon runner.

The strength of the jobs market continues to flummox the Reserve Bank and its army of economists in a development that should also worry both Albanese and Peter Dutton.

As Bullock noted, the strong jobs market is the issue that supports keeping rates on hold.

That’s because the bank has been expecting higher interest rates to lead to an increase in the jobless rate and a fall in inflation. That’s what central banks have believed for eons.

Instead, the jobs market appears to be getting tighter. The bank now thinks unemployment won’t get above 4.2 per cent over the next two years. That would take unemployment at or below 4 per cent to half a decade – something unseen in this country since people were buying Thin Lizzy LPs.

And while people continue to get jobs, inflation is easing. Bullock said she was pleasantly surprised at how unemployment remains low while inflation is falling.

But there are ongoing doubts within the bank.

“We judge that the labour market will likely still be operating above capacity over the next couple of years, though there is considerable uncertainty around this assessment,” the bank noted in its quarterly monetary policy statement.

The RBA is not actively looking to throw people out of work so it can get inflation back inside its 2-3 per cent target. But softness in the jobs market is pivotal to the models it uses to forecast when inflation will ease.

Prime Minister Anthony Albanese will be relieved by the interest rate cut.Credit: Alex Ellinghausen

So concerned about the issue is the bank that it lists as its number one risk to the economic outlook that it may “have misjudged how much excess demand there is in the labour market”.

One misjudgement may be about what’s going on as people move around to a new job. It said there appears to be fewer people switching workplaces, which suggests there’s less pressure on wages than the bank had expected. If that’s right, then overall wages growth is going to slow rather than remain around its current level.

But the bank’s forecast for wage growth this financial year – of 3.4 per cent – is predicated on an increase in people moving around looking for a better-paying job.

There has been sharp criticism of the growth of people in public service jobs. But much of the growth was in education and health jobs, almost as if these jobs aren’t crucial to a functioning society.

The RBA notes that the health sector is pulling workers from other parts of the economy, but wages growth for health workers is the same as for everyone else.

In other words, job switching is not pushing up wages.

That’s just one example where the bank knows it is struggling to get a grip on the jobs market.

If the bank has misjudged the situation, and has left interest rates too high for too long, then it will be either Albanese or Dutton paying the political price.

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