The Reserve Bank’s (RBA) decision to keep interest rates on hold for October was no doubt a partial surprise for those who, in recent months, were expecting its aggressive rate-hiking cycle to continue.
These expectations persisted, despite falling inflation, rising unemployment, weakening economic growth, and the full impact of the 400 basis points of interest rate hikes already delivered by the RBA yet to be fully felt in the economy.
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For those alert to the issues that matter for the RBA, there has been little doubt the current restrictive stance for monetary policy will deliver lower inflation in reasonable time and any further interest rate increases will see an even harder landing for the economy with even higher unemployment.
This is why more interest rate hikes are - and would have been - bad policy.
In terms of the October decision on interest rates, RBA governor Michele Bullock noted that inflation was set to fall back to the 2-3 per cent target range within the forecast horizon. This is good news, and that forecast is based on the current stance of monetary policy.
Bullock noted some other key markers for the economy.
“The economy is still experiencing a period of below-trend growth and this is expected to continue for a while,” she said.
“The unemployment rate is expected to rise gradually to around 4.5 per cent late next year. Wages growth has picked up over the past year but is still consistent with the inflation target.”
This tone of commentary is little changed from the last statement from the RBA. Its main concerns in the months ahead come down to global economic conditions in general - but for China in particular - just how much the unemployment rate will rise and, importantly, the September quarter inflation data - due to be released on October 25.
If the quarterly inflation rate comes in around 1 per cent, annual inflation will step lower, to around 5.2 per cent. This will be significant progress from the peak of 7.8 per cent at the end of 2022. And this includes what is shaping as a one-off blip in petrol prices, driven by a sharp and temporary hike in global oil prices after major producers scaled back their production.
Updated forecasts due in November
Immediately following its next rates decision in November, the RBA will release its updated economic forecasts. These will help to set the scene for whether the rates-on-hold stance is further entrenched or whether there are any risks that could see a change in interest rates in the months ahead.
The melting pot of economic news suggests the on-hold decision will likely be the prudent course to take, especially with the government holding a firm hand on budget settings.
In simple terms, there is no obvious need to further increase interest rates. Indeed, the hunch that led Bullock’s predecessor, Philip Lowe, to hike interest rates on four occasions in the first half of 2023 is increasingly looking like overkill.
It is clearly too early to be seriously considering interest rate cuts, but a situation where inflation unexpectedly eases, the unemployment rate rises and growth disappoints, could have the RBA considering interest rate cuts around the middle of 2024.