When most economists thought a July cut a certainty, one doubter is now calling an August cut a “slam dunk”. Is our RBA board gutsy enough to do what business owners and borrowers would love them to do by cutting rates by a half-a-point next month?
Economics is a guessing game. Following yesterday’s job numbers, the RBA and four out of 36 economists surveyed by the AFRahead of the failed rate cut in July were wrong about the economy and it turns out that they’re bad guessers. This gives ammunition to those like Paul Keating who have a pretty negative view about the history of our central bank often being “late to the party”.
As someone who has watched the RBA and its myriads of governors, I will be fair. While I think they’ve been better than most of their rivals globally, central bankers are a conservative lot. An unfair person might argue that we have the best of a bad bunch. (I wouldn’t but others might!)
When most economists expected a rate cut was a certainty in July, one of those rate cut doubters is now calling an August cut a “slam dunk”. Of course, that comment didn’t come with a “I guess I got that wrong”.
Okay, so what was the news from the Australian Bureau of Statistics (ABS) on the state of the job market in June that the RBA got so wrong?
Here’s a quick summary:
A much more gracious economist (compared to me) is Andrew Boak of Goldman Sachs. This is what he told the AFR’s John Kehoe: “In terms of policy implications, we continue to expect the RBA to cut 25 basis points at its next meeting in August after its surprisingly hawkish ‘on hold’ decision last week. The data also support our view that Australia’s labour market is no longer ‘tight’ and
should not be a barrier for further cuts.”
That’s a nice way of saying that the RBA was too cautious at the July interest rate meeting and should have cut rates then. While Boak held back on saying “maybe we need a half-a-point cut next month”, like me, he’d doubt that this board is gutsy enough to do what a lot of business owners and managers would love them to do.
Stopping the RBA from giving a jumbo cut next month would be fears about jumpstarting inflation again. That’s why July 30 is a big day for rate cut hopers. On that day, we see the June quarter Consumer Price Index, which tells the more accurate story about inflation in Australia.
Here the big watch will be the underlying inflation reading. If it’s less than 2.7%, then a cut should be a certainty. While the money market has priced a cut at over 90%, that’s what these interest rate experts thought ahead of the last RBA meeting!
The Governor will put on a brave face, which the top central banker has to have. While she’ll preach the value of not being too rash to rush to rate cuts, as an economist she also knows the RBA’s 13 rate rises from 2022 historically work with a long lag. Maybe the slowdown of the economy is greater than she and her board have been ‘guessing’.
For the sake of the economy, my clients and my business, I hope Governor Bullock and her board have been on the money with their guessing. My ego and the calibre of my guessing isn’t more important than the future of people’s jobs, their businesses and their material well-being.
By the way, the foreign exchange market looked at those job numbers and sold our dollar down because the players there are betting on an August rate cut. This morning the $A is 64.93 US cents. A week ago, it was nearly 66 US cents! Enough said.
