The guessing game over rate cuts has begun in earnest

Rate hikes are likely off the agenda for the time being. But don’t count on a cut any time soon.

The kick-up in US inflation, revealed overnight Wednesday, was a huge and extremely timely reminder about interest rates –obviously particularly in America but also here.

This reminder was then reinforced by the - at core, ‘good news’ - local jobless numbers Thursday.

Now, in both places there’s been a broad assumption across the economentariat that once rates are stopped being hiked, the Fed and the Reserve Bank will then move almost immediately to rate cuts.

So we’ve seen a ‘forecasting race’ – and a contemporaneous ‘pricing’ dynamic in the bond market – to, first, predict the ‘last rate hike’; followed very swiftly by trying to be the first to then predict the first rate cut.

That’s ‘first’ in two ways – to predict the earliest timing of the cut; and to be first to so predict.

In the US there are plenty of forecasts of rate cuts starting in the opening months of 2024; including at the Fed’s first meeting for the year at the end of January.

The ‘earliest’ rate cut forecast I’ve seen for down under is that from Commonwealth Bank chief economist Stephen Halmarick of a cut at the RBA’s second meeting for the year in mid-March (under the new 8-meeting-a-year calendar).

Now it’s entirely reasonable to conclude that rate hikes have ended – at least, in ’this cycle’ – in both places.

As I explained after the June quarter CPI numbers at the end of July, they delivered not only a rate pause at the immediate RBA August, but also the September – Philip Lowe’s last – meeting; and also at Michele Bullock’s first (as governor) in October.

Apart from anything, was Bullock really going to start her seven years with a hike; demanding to be branded the most hated woman in Australia from the get-go?

And, no, I’m not suggesting that’s why she won’t hike; but, simply, because it would be wrong to hike in October, before at least seeing the September quarter inflation numbers at the end of the month.

This makes the Cup Day meeting pivotal.

But it would take a truly terrible – and unexpected – inflation number to see a hike.

If we get through, almost certainly, November – and so by default, December – without another hike, it’s then on to February, just after the December quarter inflation numbers.

If petrol prices stay as high as they’ve jumped in the last week or so, that would by itself add 0.5 per cent to the inflation number.

Would that spike a hike?

Despite her grossly unfair and essentially ignorant verballing over ‘4.5 per cent jobless’, Bullock is even more committed to aiming at the “narrow path” of departing governor Lowe – trying to keep the jobless number low while gradually winding inflation down.

Only a major inflation surge would force further hikes; but she won’t necessarily quickly switch to rate cuts.

It looks increasingly likely that inflation will stay – at best - stickily around 4 per cent through 2024.

Bullock might be reluctant to hike, but she won’t easily cut.

It’s similar, if structurally different in the US. The Fed could leave rates at or close to where they are through 2024.