Rate cut on horizon, but not yet

Australians face potentially difficult economic times, the Reserve Bank board made clear on Tuesday after its last meeting for the year. Amid softer-than-expected GDP and wages growth, the board left interest rates on hold for the ninth consecutive meeting. While resisting pressure from the ACTU to deliver a pre-Christmas cut, the board is gaining confidence that inflation is easing. RBA governor Michele Bullock stopped short of putting a date on the likely timing of a rate cut. But hard-pressed household and small business borrowers have reason to be cautiously optimistic about a cut in the new year, although not necessarily at the RBA board’s first meeting in February.

For now, underlying inflation remained too high, around 3.5 per cent, the board said in its statement. This remained well above the midpoint of the RBA’s target range, although Ms Bullock noted that monetary policy was closing the gap between supply and demand. The board notably jettisoned its previous advice that it was prepared to raise interest rates again. Its often-repeated line that it was “not ruling anything in or out” was not included in its statement. Softer-than-expected economic growth and wages figures had “given the board some confidence that inflationary pressures are declining, but risks remain”, Ms Bullock said. “We’re not saying that we won the battle against inflation yet but we are saying that we’ve got a bit more confidence that things are evolving as we think in our forecasts.”

While noting that wage pressures had eased more than expected, the board also pointed out that labour productivity growth remained weak. And economic growth in the year to September was just 0.8 per cent, the slowest pace recorded since the early 1990s, apart from the pandemic.

While the data overall suggests interest rate relief is on the horizon, it also underlines the need for economic policy reform to kickstart productivity in the private sector. As KPMG chief economist Brendan Rynne told Jack Quail, governments cannot be the engine of growth.

Neither is Australia immune from international pressures, with geopolitical uncertainties remaining pronounced, the board noted. Jim Chalmers welcomed the progress against inflation. But he warned of the weakness in the Chinese economy, policy uncertainty in the US, conflicts in the Middle East and eastern Europe, and political turbulence in South Korea and France.