Economists urge RBA and Michele Bullock to follow US Fed Reserve example and spare rates cut knife

After the US Federal Reserve kept rates on hold for the first time since July, JudoBank chief economic adviser Warren Hogan said it was ‘very much a cautionary tale for the RBA’.

RBA Governor Michele Bullock. Picture: NewsWire / Jeremy Piper

Some economists are urging the Reserve Bank to heed the lessons of the US in avoiding rushing to cut interest rates in February, with inflation in the world’s largest economy on the increase and no further relief for mortgage holders in sight.

After the US Federal Reserve on Wednesday kept rates on hold for the first time since its meeting in July, JudoBank chief economic adviser Warren Hogan said it was “very much a cautionary tale for the RBA”. Mr Hogan – who has come under criticism from Jim Chalmers over his stance on monetary and fiscal policy – said inflation was increasing in the US, despite that economy being more ready for an interest-rate cut last year than what Australia was now.

“The Fed, when they started cutting six months ago, were concerned about a recession, as were markets, and really concerned about the economy falling in a hole,” Mr Hogan said.

“Stickiness with inflation is ­exactly what is hitting America and they are continuing to see ­employment grow and, of course, inflation has stopped falling and is  actually rising a bit. So their cash rate .... (is) pretty much in line with ours and they have stopped cutting.”

U.S. Federal Reserve Chairman Jerome Powell. (Photo by Kayla Bartkowski / GETTY IMAGES NORTH AMERICA / Getty Images via AFP)

Economists and financial markets are overwhelmingly predicting an interest-rate cut in February, after figures released on Wednesday showed that under­lying inflation had dropped to 3.2 per cent in the year to ­December.

Underlying inflation has been below the RBA’s 2-3 per cent target for the past six months, annualised at about 2.6 per cent.

KPMG chief economist Brendan Rynne said the US experience should “absolutely” be a warning to the RBA about cutting rates too quickly.

“We are still in an incredibly tight Labor market position. And we think that still adds to inflationary pressures within the Australian economy,” Dr Rynne said. “The other thing is services ­inflation is still at 4.3 per cent.

“So core inflation is only being driven by low goods inflation and goods inflation, largely, has also got exchange rate pressures in there.

“And that exchange rate has also fallen during January.

“So that is going to come back a little for the beginning of the year.”

Dr Rynne said the impact of US President Donald Trump’s trade wars might also have inflationary impacts in Australia.

He said high government spending had made it harder for the RBA to begin cutting rates. “That added with the significant increase in public sector ­employment has continued to act in a countervailing way to what we want the pricing and labour market pressures to be doing at this time,” Dr Rynne said.

US Federal Reserve chairman Jerome Powell on Wednesday defied the US President and declared that he was in no hurry to cut rates again, with inflation rising from 2.4 per cent to 2.9 per cent since the first rate cut in September.

Mr Powell also signalled that there was uncertainty about the impacts from the policies of the Trump administration.

Independent economist Saul Eslake, however, said the US ­experience should not deter the RBA from cutting rates in ­February.

“It will take some time for whatever inflationary impulse that emanates from Trump’s policies … to filter around the world, including here in Australia,” he said.

“There is quite a significant downward trend and it is therefore highly likely that the March ­quarter underlying annual inflation rate will be (below 3 per cent).”

“Monetary policy acts with a lag.”