Fractured RBA board to come together and cut rates
Some financial relief is coming for homeowners as the central bank readies to cut interest rates next week after its surprise decision to hold fire last month.
The fractured and potentially heated debate that marked the Reserve Bank of Australia’s July policy meeting, ending in a surprise decision to keep interest rates on hold, will be replaced next week with a confident and unified vote by the monetary policy board to deliver the third rate cut in this cycle.
Backed by compelling second-quarter inflation data showing core price pressures nearing the centre of the bank’s 2-3 per cent inflation target, there is no longer any reason for further debate or delay, and the process of cutting rates steadily and cautiously can continue into the second half of the year.
To be sure, it will be a moment of triumph for RBA governor Michele Bullock, who in just under two years in the bank’s top job has seen off the problem of spiking inflation, and looks set to retain historically low unemployment that many of her predecessors would have given a limb for.
The RBA is on track to lower the official cash rate by 25 basis point to 3.60 per cent, while also highlighting an economy at or near full employment, and showing signs of increased momentum in areas such as household spending and services activity.
Even after delivering the cut, monetary policy will still be a little on the tight side, giving the RBA reserve firepower should shocks emerge.
The board’s narrative on Tuesday will be on the balance of risks in the second half of the year, with further interest rate cuts set to flow, taking the OCR closer to 3 per cent by the end of the year.
There’s potential for it to go even lower than that if unemployment continues to rise, or, as is possible, inflation starts to undershoot the target band.
Renewed recession fears in the US will be high on the list of worries for the board, but the RBA will downplay that scenario to a degree, arguing that Australia’s prosperity is linked more to Beijing than Washington.
Locally, the job market will be on the radar of the RBA after unemployment climbed unexpectedly to a four-year high of 4.3 per cent in June.
Further increases will quickly fan a fire around the central bank, massively increasing pressure from Canberra and markets to take policy settings back to an accommodative stance.
Ms Bullock said earlier this month the rise in the jobless rate was consistent with its forecasts, so there’s no panic brewing at the central bank.
The RBA doesn’t believe the labour market is about to drive off a cliff. Still, there’s nothing like tremors in the job market to make central bankers worry deeply.
Any move in unemployment toward 5 per cent would be what the current leadership of the central bank will be remembered for.
For now, there’s hotspots in the job market, with the construction sector still reporting great difficulty in finding suitable trade labour, while the so-called care economy for the aged and disabled is still looking to hire workers.
The trade war is clearly a risk factor for the world economy, with recent US employment data signalling alarm. In an era of profound uncertainty, the RBA is alert to the potential for shocks.
The publication of the monetary policy board’s vote will be closely examined this month.
In July, the vote was six in favour of keeping interest rates on hold and three calling for a cut.
It’s highly unlikely the vote next week will be split, with the RBA set to make a strong case to cut.
For Ms Bullock, who suffered through a lot of anger in July from investors who had locked in a cut, the interest rate reduction will relieve a lot of pressure.
And with any luck, money market participants will stop to reflect on the fact that the combination of low inflation, historically low unemployment and an economy in recovery is something to be savoured.
The Wall Street Journal
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