Pricing in an interest rate cut

Ahead of the productivity roundtable in three weeks, Jim Chalmers has every reason to be ebullient. Headline inflation is at 2.1 per cent, its lowest level since March 2021, making an interest-rate cut in August a certainty. The key underlying inflation rate – which strips out volatile prices and is watched closely by the Reserve Bank in setting interest rates – eased to 2.7 per cent from 2.9 per cent. As a result, financial markets are pricing in a full 0.25-percentage-point interest rate cut to 3.6 per cent at the central bank’s meeting on August 11 and 12, a week before the roundtable. An interest rate fall will be a welcome boost for heavily mortgaged homebuyers and small businesses. It could also stimulate further rises in the property market.

Unemployment, at 4.3 per cent, is at one of its lowest points for decades, and wages growth is strong. The stage is set, should the Treasurer choose to take advantage of the good economic conditions – which many nations would envy – to take the lead on economic reform at the roundtable to lift productivity. Doing so would lead to long-term gains in living standards.

Reserve Bank governor Michele Bullock, with whom Dr Chalmers shared the kudos for what he called the “stunning’’ CPI figure released on Wednesday by the Australian Bureau of Statistics, will feature prominently on the first day of the roundtable. That is good. Ms Bullock has underlined the importance of productivity gains in sustaining wage rises. “I think generally what you would expect is if productivity doesn’t recover, then wages growth will have to come back to meet productivity growth,’’ she said recently.

Dr Chalmers, who has received 800 submissions ahead of the roundtable, is confident there will be “enough areas’’ where “common ground’’ will be found to improve living standards. The submissions cover everything from detailed tax reforms to ideas about artificial intelligence, research and development, and housing. Union bosses, seemingly in a parallel universe, want longer holidays and shorter working weeks for more pay. Business needs to explain the mutual advantages of a more flexible workplace system, or at the very least prevent it becoming even more rigid and restrictive. Balancing the push for deeper emissions cuts with the need for affordable energy for industrial and domestic consumers, and containing government spending to balance budgets and pay down debt, must be part of the mix. There should be no lack of opportunities and ideas. Consensus will be harder to achieve.