24 June 2024
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RBA boss didn’t promise rate cuts but they're coming

Peter Switzer
7 February 2024

I know the media has to do their job and it’s always easier and more interesting for them if they can peddle bad news, but it doesn’t always give their readers, listeners and viewers the 100% true story.

News outlets will talk about the “door was left open” for future rate rises, but the truth is that RBA Governor Michele Bullock didn’t slam the door on the first rate cut either.

Basically, Bullock wisely said nothing is ruled in or out, which makes perfect sense. You see, right now, inflation is falling but it’s still 4.1%. However, most economists passing ‘expert’ comments thought the December quarter CPI would’ve been a lot higher.

And few got the November monthly inflation statistic right either, so for all of us with economics training, we know inflation could slip down another notch in the March quarter, rise a little, or stay around the same.

However, while I’m betting inflation keeps falling, the RBA boss would’ve done herself no favours by coming out yesterday and saying “inflation is falling, so get ready for a cut or two in coming months”.

Although we might have liked her to say that, it might have made us more confident enough to start buying or borrowing again, which could rekindle inflationary forces.

That said, Bullock didn’t plat killjoy saying: “If the risks on the downside present themselves, then we have the options of cutting interest rates…” but wisely she added: “…if the risks on the upside eventuate, then we might have to look at whether or not we need to increase again.”

The Governor and her board don’t want to “backtrack” and raise rates because they went too soft too early and cut, which could get inflationary expectations up, that leads to higher pricing and then inflation.

The Monetary Policy statement always tries to ‘guess’ what might happen to the cash rate and right now it says it should be 4.35% — the current rate until mid-2024. After that, two cuts could happen between December this year and 2025.

But if they’re wrong about the drop in inflation and it falls faster than expected, then the Board could get worried about a severe slowdown or recession. So, we could see three rate cuts by year’s end.

One threat to the economy that no one asked about at the conference is how the mortgage cliff is going. I want to know if most people who were on low fixed rate loans are now on high variable rate loans, because that’s when retail spending and services spending on holidays, and such will start to really fall.

The December quarter numbers showed goods inflation fell faster than expected but services inflation was falling slower. I’m seeing signs that restaurants look quieter, holiday bookings are down, and this could be the impact of more borrowers now on higher rate loans.

Importantly, AMP’s Shane Oliver and his Australian Pipeline Indicator, which has been very reliable in predicting where inflation was heading a few months in advance of the official CPI, is still saying inflation is on the slide. See the blue line below in the chart below which is more around 2%, while the red line for the actual CPI now is more near 4%.

I’m betting there’ll be more good news on rate cuts from the RBA Governor as the year unfolds.

By the way, I thought the best revelation from the Governor was that her kids saved up their own money to buy their tickets to Taylor Swift. This means they saved, which helped bring inflation down, but then they paid HUGE prices to see this multi-Grammy award-winning American singer/songwriter, which would’ve contributed to services inflation.

But at least Swift would’ve taken a lot of the money home to the US, which would have slowed down spending here and helped reduce inflation.

All up, the Governor’s kids helped their mum!

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