Why the RBA’s interest rate cut will take longer than you think

The RBA’s policy-setting board is still cautious, wanting to avoid doing anything that might easy monetary conditions prematurely through a fall in market interest rates.

The Reserve Bank isn’t keen on joining the rush by other central banks to cut interest rates just yet, amid concerns that the commodity-rich Australian economy is still too lively to guarantee that inflation will sustainably return to target in the near term.

The job market remains turbocharged, with more than 60,000 jobs added in September – the vast bulk of them full-time positions – while the unemployment rate remains near historic lows at just over 4 per cent at a time when labour market participation is at record highs.

Add in weak productivity growth and strength in wages and you have a central bank that isn’t prepared to join the easing party where others like the Federal Reserve and Reserve Bank of New Zealand are slashing rates in 50-basis-point increments.

That could all change if Australia’s third-quarter inflation data next week proves truly scintillating, but the report is going to have to deliver a genuine low-side surprise to encourage the RBA to shift to an easing bias.

Even news that headline inflation is back within the 2-3 per cent target band won’t cut it, as that success would be due in large part to the impact of federal government rebates to offset soaring electricity costs.

Core inflation is also expected to fall to about 3.5 per cent on the year in the quarter. A result like that would be welcomed, but not viewed by the bank as a trigger to immediately adopt an easing bias.

The RBA’s policy-setting board is still cautious, wanting to avoid doing anything that might ease monetary conditions prematurely through a fall in market ­interest rates.

Its benign, colourless narrative will persist for a while yet.

Some economists were pushing the view that recently published minutes of the RBA’s last policy meeting were laced with dovish intent, but that can also be tossed out. The fact that a further lift in rates was not explicitly discussed at the meeting does not mean it is off the table.

The situation was best summarised by RBA deputy governor Andrew Hauser, who said on Monday that there had been no cuts thus far because inflation remained too high.

“The reason we’re not cutting rates at the moment … relative to some of the other central banks is fairly straightforwardly stated, actually, that inflation is still too high,” Mr Hauser told the Commonwealth Bank global markets conference in Sydney this week.

The RBA also has the problem of strong state and federal government spending, which is significant enough to potentially make the difference between the economy expanding and sliding into recession.

Above all, the RBA is bent on avoiding the job destruction that comes with recessions, so it is not going to argue too strongly against current fiscal settings, even if they may be delaying a cut in the official cash rate.

With the policy focus now clearly on 2025, the RBA knows that when it comes to cutting rates, the start of its easing cycle won’t have the pyrotechnics that accompanied those by other central banks.

The fall in interest rates next year is likely to be shallower than most expect, with the RBA moving slowly in part to avoid a situation where consumers and firms build expectations that rates will again resemble the emergency lows seen during the pandemic.

The RBA raised rates more slowly than other central banks in the wake of the pandemic, so it doesn’t have to cut as savagely.

That is playing out, but the wait for the RBA to cut might well be lengthier than many expect.

With a cut this year probably off the table, those with massive mortgage debt may have to wait until later into next year for some relief.

Dow Jones Newswires