Economists are not known for their humility. Leading up to the Reserve Bank’s meeting this week, most of the tribe were certain there would be a cut to the cash rate, with a 25-basis-point reduction the most likely outcome.
There was a handful of holdouts, but not many.
For this reason, the decision of the bank to hold the cash rate at 3.85 per cent – with a 6/3 split in the vote – came as something of a shock. For those with large mortgages, the decision will be a huge disappointment.
To be sure, there was some acknowledgment by some economists that the bank might wait until the release of the June quarter CPI figures. These figures print on July 30 and so there is not long to go. The monthly CPI figures are not nearly as comprehensive as the quarterly ones, and the next RBA board meeting is only five weeks away.
RBA governor Michele Bullock also reminded the assembled band of economic interlocutors at the press conference that that target inflation rate, as measured by the trimmed mean (and not the headline figure), has been reached only once.
She also made the eminently sensible point that the bank didn’t want to fight inflation again.
It was better to confirm that the strategy had sustainably passed the finishing line rather than having to backtrack and, in a worst-case scenario, raise the cash rate again. The fact that the cash rate has been reduced by 50 basis points this year shouldn’t be overlooked.
There is no doubt that the uncertain global economic conditions had a bearing on the bank’s thinking. It’s still not clear what the final form of the Trump tariffs decisions will take; the economic repercussions will only emerge over time.
This factor alone is unlikely to affect the likelihood of a cut to the cash rate at the next board meeting – this looks to be in the bag, all going well – but the bank will want to have some room to move should the global economy slow down very significantly.
It was interesting that productivity was one focus of the post-decision press conference. After all, there is really nothing that the bank can do to alter the growth of productivity directly, although business investment is partly determined by interest rates.
There is also an issue of the RBA’s forecasting of economic conditions and the assumption in the modelling that productivity will be returning to trend in the near future. On the face of it, this looks to be too optimistic.
The point here is that sluggish or no productivity growth does constrain the scope for the bank to reduce the official interest rate to a neutral setting. The growth of GDP is the product of the change in working hours and labour productivity. If the aim is to see GDP growing at a reasonable clip and maintaining a low rate of unemployment, it would be a great deal of help if productivity were to pick up.
The governor welcomed the reform roundtable to be convened by Jim Chalmers, in August. She will be one of the participants.
No doubt she will be looking forward to hearing some breakthrough suggestions on which the government will be able to act quickly. She also wisely noted that productivity growth is more a medium-term factor than something that will pick up quickly.
No doubt, the federal Treasurer, would have preferred a different outcome.
He understands the pressures that many mortgage holders have been dealing with, but an independent central bank must be left to get on with meeting its defined objectives. There’s always the next meeting.
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