The International Monetary Fund (IMF) has run its eye over our economy and there’s bad and good news. The bad news is that the IMF thinks rate cuts could be a longer time in coming to a loan near you! The good news is that it’s highly likely you’ll have a job to pay that globally higher interest rate loan!
The AFR broke the news as Treasurer Jim Chalmers jets out to Washington for meetings with other finance ministers and central bankers this week.
Unfortunately for Jim, if they were handing out a dunce’s hat for failing to kill inflation, he and the Slovak Republic finance minister would be vying for the ‘award’. Happily, according to the IMF, the Aussie number cruncher would just miss out, with Iceland topping the inflation chart this year with 5.2%. We came in at fourth, behind Israel on 3.4% and Croatia on 3.3%.
Meanwhile, the Slovak Republic on 4.8% is expected to just beat us for the dunce hat next year, while we’ll come second on 3.6%!
That’s higher than this year’s 3% and it’s linked to the end of the energy rebates next year.
All this bad news comes as the money market this week changed its bet on when the RBA will cut rates. Until this week, February looked like the time we’d see the first rate cut. But after Andrew Hauser, Deputy Governor of the RBA, did a public chat and indicated the big bank’s board was surprised by the strength of our job market, the timing of the rate cut looks like it has been pushed out.
It’s the fact that we’re creating jobs faster than expected and that the RBA wasn’t as mean as other central bankers in raising interest rates that explains a lot of our slow falling inflation rate.
But there are other reasons, such as:
1. Generous pay rises supported by unions and former Workplace Relations Minister Tony Burke.
2. Budget tax cuts that favoured lower income Australians who spend tax cuts rather than richer types who save or invest tax windfalls.
3. Big Aussie companies price gouging and overcharging us.
4. A lack of strong action by the ACCC.
5. Covid, which built up our bank balances, so we didn’t feel the heat of the early rate rises.
6. The 48% of Aussies who had fixed rate home loans, when usually it would be only 20%. You can thank Covid’s low rates and Dr Phil Lowe’s ‘rates won’t rise until 2024’ message for that.
7. Record high immigration rates and new arrivals need to buy ‘stuff’ and rent somewhere, which not only kept prices high but added to rents and house prices.
8. Our labour productivity ‘sucks’.
9. The Albanese Government’s pressure to win an election in May has put pressure on the RBA.
On the RBA’s rate rises, the IMF view is that we ‘wimped out’ but that has helped stop unemployment spiking towards 5%, with the current jobless rate being only 4.1%.
“Central banks in Canada, Britain, New Zealand and the United States raised policy rates above 5 per cent to tame inflation, while the RBA stopped raising rates at 4.35 per cent,” the AFR’s John Kehoe and Michael Read revealed. “Those four central banks have cut interest rates in recent months, while RBA governor Michele Bullock has said the board does not expect to reduce borrowing costs this year.”
Both the Federal Government and the RBA chose to try and beat inflation down under 3%, without burning the jobs market. They’ve achieved the latter but have under-achieved with the former, so rate cuts will be delayed.
Until when?
The latest betting is that it will happen in May, as we go to the polls to select Anthony Albanese or Peter Dutton as our next PM.
Interestingly, this week, the Treasurer told us inflation will be at 3% by year’s end. That implies the RBA should be cutting rates by February! At this point, I’d remind readers that the IMF’s forecasting can be as bad as an expert tipping the winner of the Melbourne Cup!
Given my reliance on experts, my ‘win’ rate on the Cup isn’t worth crowing about. I’d never put my money on anything the IMF tipped!