Yahoo Finance RBA risking ‘entrenched’ weakness, higher job losses as boss likened to ‘Seinfeld’s soup nazi’
The economy grew by just 0.1 per cent in the March quarter, while unemployment has lifted to 4.1 per cent.
A top Aussie economist has warned the Reserve Bank (RBA) is risking the country falling into an “entrenched period of weakness” and “entrenched higher employment” by not cutting interest rates. The cash rate is currently at a 12-year high, with many mortgage holders desperate for some repayment relief.
Economist and Yahoo Finance contributor Stephen Koukoulas said the RBA needed to drop interest rates over the coming months if it wanted to avoid the economy getting into a “deep, low growth, high unemployment funk”.
The economy grew by just 0.1 per cent in the March quarter, while the annual increase in GDP was just 1.1 per cent, which was the weakest result in three decades outside of the pandemic period. The unemployment rate lifted to 4.1 per cent in April.
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“What I’m talking about is the RBA trimming rates two, three, four times over the course of six, nine, 12 months to take some of the heat off the household sector, which is clearly under significant downward pressure,” Koukoulas said.
“To take some of the risk that’s there that if they keep interest rates too high for too long that we get this entrenched period of weakness, entrenched higher unemployment.”
Koukoulas said it was extremely unlikely this scenario of 100 basis point cuts would rekindle inflation pressures or push the unemployment rate back to 3.5 per cent as some are fearing.
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Rate cut hopes pushed back to 2025
The latest data showed inflation had climbed to 3.6 per cent in the 12 months to April, which was slightly higher than the forecasted 3.4 per cent.
Money markets have priced in the risk of another rate hike and pushed back expectations for a rate cut until later next year following the uptick in inflation.
Earlier this week, RBA governor Michele Bullock issued a word of warning to Aussies hoping for an interest rate cut, saying nothing was being ruled out.
“If it turns out, for example, that inflation starts to go up again or it’s much stickier than we think we’re not getting it down, then we won’t hesitate to move and raise interest rates again,” Bullock told a Senate estimates hearing.
However, if growth was lower than anticipated, Bullock said the RBA would look to cut interest rates.
“If it turns out that the economy is much weaker than expected, and that puts more downward pressure on inflation, then we’ll be looking to ease,” she said.
Bullock likened to ‘soup nazi’
Finance expert David Koch said Bullock was using a “carrot-and-stick strategy” on Aussies and if “we don’t toe the line then the stick comes out”.
“It doesn’t get much clearer than that. Think the infamous soup nazi in the Seinfeld TV series: no rate cuts for you!” Koch wrote in The Nightly.
“Because that is what Ms Bullock is saying. No rate cuts for us for quite a while. Forget any cuts before the end of the year. There is now every likelihood of rate INCREASES.”
Koch and Koukoulas say a key piece of data to watch will be the unemployment rate, with the RBA aiming to bring inflation back to target while keeping unemployment as low as possible. The budget has forecast unemployment to hit 4.5 per cent by mid-2025.
“Economic history tells us that when economies weaken, unemployment initially rises slowly but then accelerates quickly,” Koch said.
“The question is whether we have reached that tipping point and saving jobs becomes more important than getting inflation down that little bit further to within the desired 2 to 3 per cent band.”
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