Oops. Did the Reserve Bank get that last rate decision wrong?

Apologies in advance to economists and traders for this description, but it looks like we are witnessing Revenge of the Nerds. It’s payback time for the economists and traders who put a 99 per cent likelihood on the Reserve Bank lowering interest rates last week and who appeared to have been caught with their pants down.

They had their savant credentials restored after Thursday’s weak employment data. Now it’s the Reserve Bank that is under the spotlight.

Reserve Bank of Australia governor Michele Bullock.Credit: Dominic Lorrimer

The weaker employment numbers provide clearer evidence that the central bank may have erred too far on the side of caution in keeping rates on hold.

Last week’s “shock” decision to keep rates steady made the forecasting collective look like chumps, and while most of them wouldn’t say it publicly, they were stung by the left-field move of Michele Bullock to wait for some more reliable monthly data before nudging the interest rate further south.

What looked like Reserve Bank prudence last week will be seen by many as a miscalculation.

The unemployment rate for June came in at 4.3 per cent, compared with market expectations that it would remain steady at 4.1 per cent. (I guess you could say that economists got that wrong also.)

This means there are an additional 34,000 people unemployed in Australia, while hours worked fell – which all adds up to a softer jobs market.

Unemployment is now at a level not seen since the aftermath of the COVID-19 pandemic 3½ years ago.

The Reserve Bank was not pencilling in a rise to that level this soon and was expecting the June number to come in at 4.2 per cent.

Last week while releasing its rate decision, the Reserve Bank said “various indicators suggest that labour market conditions remain tight … and that availability of labour is still a constraint for a range of employers”.

The new game is predicting whether the bank will ... decrease the interest rate by a larger 50 basis points.

Thursday’s numbers were seen as vindication by economists and experts who mark themselves for the accuracy of their forecasts on economic data.

That said, even if their interest rate predictions reflect what the Reserve Bank should have done, their near-universal misreading of how the central bank was thinking is still a blot.

With June’s labour force numbers out, now the merry dance of predicting rate movements and second-guessing the Reserve Bank begins afresh.

This time economists are even more certain (although it’s statistically difficult) that the RBA will lower rates in August, which is the next time they meet on monetary policy.

There are 34,000 more people unemployed in Australia, according to June labour force figures.Credit: Louie Douvis

The new game is predicting whether the bank will take the plunge and decrease the interest rate by a larger 50 basis points next month.

There will be some economists bold enough to go out on that limb, but most are sticking to the near certainly of a 25 basis point cut.

The more critical issue for borrowers and depositors is what is called the terminal rate – where the rate finishes in this lowering cycle.

There are mixed views around this – some think the Reserve Bank will tap out when the interest rate hits 3.1 per cent – down from the current 3.85 per cent level.

At the other end of the spectrum, there is an increasing number of experts who are predicting that by 2026 the rate will fall to 2.85 per cent.

The one thing on which there is agreement is that the next movement in rates will be down.

At July’s monetary policy meeting, the Reserve Bank board was split 6-3 in favour of holding.

You would have to imagine that in August it will be unanimous.

That’s great news for the mortgagors – because it will take the monthly pressure off paying interest or allow them to boost their offset accounts and pay down their loan more quickly.

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